Bringing more affordable financial services to the inner city : the strategic alliance between Bethex Federal Credit Union and RiteCheck Cashing, Inc. : a case study

Completed– 08/01/01 – Do not quote without permission of the Center for Community Capitalism.
The Center for Community Capitalism, Kenan Institute of Private Enterprise
University of North Carolina – Chapel Hill
Stegman, M. and Lobenhofer, J. (August, 2001.) Bringing More Affordable Financial Services to
the Inner City: The Strategic Alliance between Bethex Federal Credit Union and RiteCheck
Cashing, Inc. Chapel Hill, NC: Center for Community Capitalism.
Bringing More Affordable Financial Services to the Inner City:
The Strategic Alliance between Bethex Federal Credit Union and
RiteCheck Cashing, Inc.
A Case Study
by
Michael A. Stegman∗
and
Jennifer S. Lobenhofer#
Center for Community Capitalism, in the
Kenan Institute of Private Enterprise
University of North Carolina at Chapel Hill
August 2001
∗ MacRae Professor, Public Policy and Business, and director of the Center for Community Capitalism, University
of North Carolina at Chapel Hill
Completed 08/01/01 – Do not quote without permission of the Center for Community Capitalism.
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1
Introduction
This case is an examination of an innovative corporate-community development alliance. It
involves a cooperative program between a community development credit union, Bethex Federal
Credit Union, and licensed check cashing outlets (CCOs) in the Bronx, New York. RiteCheck,
which owns eleven check cashing locations in inner-city Bronx and Manhattan neighborhoods,
has taken the lead among New York check cashers in building this partnership. A RiteCheck
store is the first CCO involved in the pilot, and other RiteCheck locations will become involved
as the project grows. Other check cashing firms have expressed an interest in participating, and
it is anticipated that, when fully operational, the pilot will involve 14 CCOs owned by as many
as three firms.
The pilot project was implemented in April 2001 after more than four years of planning.
Because it has only been in operation for a short while, all of the benefits of the partnership as
discussed here are projected. There has not yet been time to assess the results of the
arrangement, but because it is both unusual and cutting edge, it bears examination, as it exhibits
several promising features of ‘win-win’ practices. Moreover, despite the fact that the concept
offers expanded business opportunities for both partners as well as increased access to basic
banking services for people in low-income neighborhoods, it is not without its critics and
controversy. These concerns—the reason the concept took so long to become reality—will be
discussed in the case as well.
Having realized that they share a customer base that is chronically underserved by other financial
institutions, each of the principals in this case was already thinking of the other as a partner by
the time they met in 1997 and began discussions. The express purpose of the strategic alliance is
to make credit union services more accessible to lower income consumers living within the credit
union’s field of membership.1 The partners hope that the capability to make deposits through a
check cashing outlet, as well as the presence of credit union marketing materials in those outlets,
will encourage check cashing customers who do not have bank accounts to open credit union
accounts and thus become part of the financial mainstream. The partnership is also a strategy by
an innovative credit union to increase its branch presence in underserved neighborhoods without
incurring the expense of acquiring or building additional bricks-and-mortar facilities.
In fulfilling a branch role for the credit union, check cashers hope that the availability of deposit
services will increase the walk-in traffic and thus expand the overall volume of transactions upon
which their business depends. By allying themselves with an organization whose mission is to
serve the needs of a low-income population, they also hope to improve their overall standing in
the community and at least partially overcome the negative perception of their industry held by
advocates for poor communities.
Technology is another critical feature of this partnership. Strategic alliances such as this one
would not be possible without sophisticated technology and networks for conducting a variety of
financial transactions. Today, the most advanced check cashing operations have access to the
# Senior Research Associate, Center for Community Capitalism, University of North Carolina at Chapel Hill
1 Bethex is a community development credit union with a geographically defined field of membership in the South
Bronx.
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2
same technology and Automatic Teller Machine (ATM) networks that mainstream banks use.
Indeed, RiteCheck has access to better technology than does Bethex, and the fact that RiteCheck
can offer additional services to members is part of the advantage to Bethex in using CCOs as
branches.
The Context
The partnership between Bethex Federal Credit Union and New York check cashing firms is
particularly interesting because it taps into a number of concurrent trends in the financial services
industry and public policy. Utmost are the recognition that low-income families need to build
assets in order to break the cycle of poverty common in many inner-city communities and the
corresponding effort to help them accumulate those assets by providing better access to banking
services. Such services are often missing in inner-city neighborhoods because banks have found
it unprofitable to operate branches with a large volume of small transactions.
The second financial services trend important to this case is the growth of the check cashing
industry and the issues surrounding it. Check cashers have identified and filled a niche market,
providing a variety of financial services to a primarily minority, urban, largely unbanked
customer base. The industry is controversial, however; advocates for the poor have criticized
its fee structure as harmful to the low-income communities in which CCOs primarily do
business. So when a community-based financial institution (the credit union) sought out a
strategic alliance with the perceived “enemy,”—swimming with the sharks, if you will—
eyebrows were raised.
Yet partnerships between check cashers and more mainstream financial institutions are becoming
more common, a trend that represents the third critical piece of backdrop for this case.
Increasing competition in the banking industry and saturation of middle-class suburban markets
have led banks to try to develop new markets in inner-city neighborhoods. Still reluctant to
establish full branches in low-income neighborhoods, however, banks have sought various types
of alternative alliances with check cashers. This has blurred the lines between the two industries,
as banks come to look more like check cashers and vice versa.
The Need for Basic Financial Services
Despite the longest economic expansion on record and the lowest unemployment rates in a
generation, 10% of all American families have no bank accounts. This includes 25% of African
Americans and Hispanics, one-fourth of all families with incomes under $20,000, and nearly half
of all families moving from welfare to work.2 In recent years, advocates and policymakers have
grown to understand that bringing the unbanked into the financial mainstream is important,
because one’s banking status has profound implications for long-term family self-sufficiency.
“Even controlling for income and other factors, low-income individuals with bank accounts are
43% more likely to have positive net financial assets than those without.”3 Lack of savings is
particularly important to low- and moderate-income families in general and to unbanked families
2 Federal Reserve, 1998 Survey of Consumer Finances. http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.
3 U.S. Department of the Treasury, “The First Account Initiative: Bringing the “Unbanked” into the Financial
Services Mainstream,” December 16, 2000.
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in particular, because they are much less likely than other households to be covered by a
retirement plan at work. In 1998, more than nine out of ten (92%) unbanked families were
without a retirement account, compared with less than half of banked families (47%). Indeed,
for more than half of the unbanked (54%), their only asset is their car.4
At least part of the reason so many American families do not have bank accounts is the simple
fact that there are no banks in the neighborhoods where they live. Because of mergers and
increased competition from nondepository institutions, the number of financial institutions in the
United States has declined significantly. Between 1975 and 1995, the number fell from about
18,600 to 12,200, a decline of about 35%.5 Continuing to fall steadily through the late 1990s, the
number dipped below 10,000 by the end of 2000, representing an additional 17% decrease over
the six-year period.6
A decline in the number of banks does not automatically lead to a loss in local banking offices.
During the same 1975–95 period, the total number of branch offices increased by 29%, with an
additional 10% growth by 2000, but virtually all of this growth occurred in middle-income
areas.7 In contrast, low-income neighborhoods saw a 21% decline in branch facilities.8 While
nationwide branches were growing, New York State underwent a small (3%) decline between
1995 and 2000.9 Within New York City, however, Brooklyn lost around 14% of its bank
branches between 1978 and 1995 and the Bronx about 20%; a disproportionate share of these
closings occurred in the poorest neighborhoods.10
The Rise of the Check Cashing Industry
While the number of banks is decreasing, providers of alternative financial services are growing.
With an estimated $200 billion in annual transactions, this fringe banking industry—which
delivers a host of financial services from cashing checks to issuing money orders and short-term
“payday loans”—is both very big and highly profitable (see Sidebar 1).11 Payday lending, also
called payday advance (or deferred deposit by the check cashing industry) allows a customer to
receive a small, short-term loan against his or her next paycheck. The customer writes a personal
check for the advance amount plus a fee, in exchange for cash in the amount of the advance. The
lender agrees to hold the check for a specified period of time, usually about two weeks, at the
end of which the check is deposited or the customer returns with cash to reclaim the check.
4 Federal Reserve Board, Survey of Consumer Finances (1998) and calculations by the authors.
5 Robert B. Avery, Raphael W. Bostic, Paul S. Calem, and Glenn B. Canner, “Changes in the Distribution of
Banking Offices,” Federal Reserve Bulletin 83, no. 9 (September 1997, online).
6 FDIC Statistics on Banking, http://www.fdic.gov/bank/statistical/statistics/sectionb.html.
7 Avery, et. al, “Changes in Distribution,” 2, 18; FDIC Statistics on Banking,
http://www.fdic.gov/bank/statistical/statistics/sectionb.html.
8 Avery, et. al, “Changes in Distribution,” 2, 18.
9 FDIC Statistics on Banking.
10 Louis Jacobson, “Bank Failure: The Financial Marginalization of the Poor,” The American Prospect, no. 20
(Winter 1995), p. 8.
11 Scott Shepard and Elliot Jaspin, “An ‘Unholy Alliance’? Check Cashers and Banks Seen Profiting in Paperless
Era,” Philadelphia Inquirer, September 28, 1998, online.
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The core of the fringe banking industry is the network of stores across the country that classified
their primary business as check cashing. In 2000, this numbered an estimated 9,500, up from
7,100 just two years earlier; another 1,300 stores listed check cashing as their secondary line of
business.12 All told, the industry cashes more than 180 million checks a year,13 with a total face
value of $60 billion, producing about $1.5 billion in fees.14
The industry’s growth has been reflected in the New York metropolitan area. Between 1995 and
1999, the number of check cashing stores in New York City rose 11%.15 The New York State
Banking Department indicates that the city’s CCOs cashed more than $14.5 billion in checks in
1999, up from $11.4 billion two years before. During the same period, annual net income for the
industry rose from $3.7 million to $11 million.16
In contrast to conventional banks, CCOs historically have been concentrated in inner cities rather
than outlying urban areas and suburbs, although this is changing.17 Many check cashers are now
establishing locations in suburban strip centers where banks have closed.18
Because they do not have the stand-alone buildings and big lobbies, CCOs have lower facility
costs, enabling them to survive in areas where banks have struggled.19 Surveys also suggest that
“customers are satisfied with the services they receive from check cashers, which include
convenient locations, flexible hours, short lines, ancillary services such as bus passes and lottery
tickets, and, perhaps most important, immediate cash without waiting for a check to clear.”20
Market research by mainstream banks such as Chase Manhattan confirm check cashers’
competitive advantages. Chase’s Kenneth Rosenblum points out, “Check cashers are far
superior to banks in terms of the days and hours they are open for business and their ease of
access.”21
Bank–Check Cashing Partnerships
Technology and competition have prompted banks to rethink their use of traditional branches
and begin forming partnerships with third parties to deliver financial services without heavy
investments in bricks and mortar. Banks are looking to supermarkets, high-volume discount
stores, community development organizations, and check cashers to provide cheaper locations
and greater expertise in reaching consumers they have been unable to reach in the past.
12 Data from InfoUSA, cited in Survey of Non-Bank Financial Institutions. Dove Consulting, for U.S. Dept. of the
Treasury. April 4, 2000. Available at: http://www.treas.gov/press/releases/docs/nbfirpt.pdf.
13 “Q&A – NaCCA Facts,” National Check Cashers Association website http://www.nacca.org/q&a.htm.
14 Survey of Non-Bank Financial Institutions.
15 Richard A. Oppel Jr., “The Stepchildren of Banking,” The New York Times, March 26, 1999, sec. C, p. 1.
16 Heike Wipperfurth, “Check Cashers Buff Up Image,” Crain’s New York Business, November 27, 2000, p. 3.
17 Caskey, Fringe Banking, 63.
18 Joanne Gordon, “The Service Side of Strips,” Chain Store Age (February 1998): 136.
19 Stephen Wolf, Board Chairman for National Check Cashers Association, written comments to U.S. Department
of Treasury on interim EBT rule, 61 Fed. Reg. 39253, November 25, 1996.
20 Louis Jacobson, “Bank Failure: The Financial Marginalization of the Poor,” The American Prospect, no. 20
(Winter 1995), pp. 63-70.
21 Financial Access in the 21st Century, proceedings of a forum held on February 11, 1997 (Office of the
Comptroller of the Currency), p. 46.
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Economics and policy shifts have also led check cashers to seek out alliances with banks. The
transition to electronic funds transfer (EFT) for delivery of welfare and Social Security benefits
is reducing the volume of checks that need to be cashed, making check cashing a roller-coaster
business. When New York replaced its electronic vouchers redeemable only at CCOs with debit
cards that can be used at ATMs in 1999, the check cashing industry lost 20% to 30% of its
income.22 Seeking secure, steady business to make up for the loss of this previously assured
volume, check cashers are forming alliances and serving an outsourcing role for banks.
Partnerships between banks and check cashers are blurring the lines between mainstream
financial institutions and so-called “fringe banks,” which operate without either significant
consumer protections or community reinvestment obligations. As traditional financial
institutions move to a fee-based services system and fringe banks adopt increasingly
sophisticated technology and broaden their market appeal, banks are beginning to look more like
check cashers, and check cashers more like banks. Proponents say these new alliances will
provide more reasonably priced basic financial services to the unbanked and underserved, while
critics predict that the alliances will only further exploit the poor and the debt-ridden.
Ultimately, the value of these initiatives to society will depend in large part on whether they help
the unbanked (as well as those who have abused, or been abused by, the consumer credit system)
establish credit ratings so they can enter the financial mainstream.
Bank-check casher cooperative arrangements take a variety of forms (see Sidebar 2). Many
banks have teamed with CCOs to offer complementary financial services. Others have chosen to
compete head-to-head with check cashers by creating their own check cashing arms as a means
to tap into the unbanked market and to generate brand recognition and loyalty among unbanked
customers. Some arrangements are explicitly intended to serve as stepping-stones to mainstream
banking.
Few bank partnerships, however innovative, use check cashers as a portal to their services or
make an overt effort to provide a bridge into the financial mainstream for low-income unbanked
customers. This highlights the uniqueness and significance of the partnership between
RiteCheck and Bethex Federal Credit Union, a financial institution whose core mission is
economic empowerment.
Bethex Federal Credit Union
In 1970, an adult education teacher named Joy Cousminer recognized her students’ need for
economic empowerment and began working with them to establish a cooperative credit union.
The result was Bethex Federal Credit Union, a federally insured community development credit
union (CDCU) (See Sidebar 3). Today Bethex’s mission remains the economic empowerment
of low-income individuals and households in the Bronx. Outreach has always been implicit in
that mission, as Bethex strives to serve the maximum number of poor residents as possible.
As a result of its outreach efforts, Bethexhas grown from its original 600 members to nearly
8,000, and is continuing to add more than 1,000 new members per year. Bethex currently has
22 Manny Levy, president of the 16-store N.Y.C. Check Express Inc., quoted in Wipperfurth, “Check Cashers Buff
Up Image,” p. 4.
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assets of $8 million, dramatically less than the typical assets for a mainstream bank. In New
York, banks average $298 million in assets per branch.23 This gap highlights Bethex’s need to
use its assets efficiently while expanding its membership reach—just as it is seeking to do
through partnership with check cashers.
Bethex has one main office/service center that operates six days a week and two full-service
branches. One, the Roberto Clemente Credit Union, was acquired in the summer of 2000. Two
additional full-service branches, one in the Hunts Point neighborhood and the other in the Mott
Haven neighborhood, were due to become operational in May 2001. For the Hunts Point branch,
Bethex partnered with the Hunts Point Economic Development Corporation and a coalition of
local businesses. The Mott Haven branch received a boost in the form of a $200,000
construction and operating grant from the New York Empowerment Zone Corporation. Also in
May 2001, Bethex was in the process of acquiring the Columbia-Barnard Credit Union, which
was anticipated to bring an additional $1.5 million in assets and nearly 1,000 members under the
Bethex umbrella. When fully operational, these will be full-service branches open five days a
week; the Mott Haven branch will offer the added convenience of a 24-hour, wall-through ATM.
The CU also provides service to members one or two days a week at six “teller stations” located
in churches, a senior citizens center, and an animal hospital. Bethex also has a high
concentration of phone and mail transactions. The majority of Bethex’s clientele (60%) are
welfare and SSI recipients and senior citizens; the remaining 40% are generally low-income
earners who do not work for a specific employer and thus do not have payroll deductions or
direct deposit contracts.
Bethex’s commitment to expand in order to serve low-income residents is reflected in its
innovative ways of doing business. To keep lending rates and service fees as low as possible,
Bethex accepts donated equipment from banks and larger credit unions and relies on rent-free
office space. Bethex has moved so many times in its thirty-year existence that members once
called it “Gypsy Federal.” The CU also pays lower employee salaries than other comparable
institutions. Cousminer feels that minimizing costs and passing the savings along to members is
an integral part of its goal, to economically empower its members.
Bethex’s Goal Saver account/loan program is designed for people who have difficulty saving
money but are accustomed to repaying loans. A member establishes a goal to reach in a
specified period of time, and Bethex puts in the goal amount in the member’s Goal Saver savings
account, which earn 3% interest—1% higher than most of Bethex’s accounts. The accountholder
then pays an agreed-upon amount monthly to pay off the loan at 6%. Withdrawals from the
account can only be made for the amount of equity that has been accrued. This program helps
people build credit and develop the habit of saving and making monthly payments and prepares
them to borrow on a larger scale. .
Bethex offers a 2% dividend on accounts. Mortgages are available through a partnership with a
New Jersey credit union. Bethex makes consumer loans up to $10,000 and is a Small Business
Association (SBA) guaranteed lender for small business loans—currently the only small CDCU
in the country with this designation. The relationship took five years to set up, but Cousminer
23 FDIC Statistics on Banking, http://www.fdic.gov/bank/statistical/statistics/sectionb.html.
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says the SBA is now considering designating fifty other small CDCUs. Bethex markets its SBA
loans through local small business centers and community colleges. Bethex’s complete rates and
fees are shown in Table 1 below.
Table 1: Bethex Federal Credit Union Fee Schedule
Service Rate/Fee Notes
Lending
Personal/Consumer loan 16.5% Unsecured, can be taken out for an unspecified purpose; often used
for emergencies
Special purpose loan 15% Short-term, taken out for purposes such as paying taxes; typically
extended to someone who already has a loan outstanding with
Bethex, but is sometimes used to attract new members or start a
payroll deduction
Business purpose or good
debt consolidation loan
11.75%
Car loan 8%
IDA and Goal Saver 6%
Savings
All share accounts 2% quarterly
CDs 5% One-year minimum, including IRAs; $3,000 minimum balance
Goal Saver account 3%
Services
Membership $5 One-time fee
Membership cancellation $5 Exception in case of death—no fee
Returned check $15
Checking account $3/month Unlimited checking
Money order $1
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RiteCheck Cashing
Joe Coleman manages eleven RiteCheck check cashing outlets in the Bronx and Manhattan. His
stores exemplify the model of a volume-based, a la carte, fee-for-service transaction business
functioning as a one-stop shop for a variety of financial services. In addition to check cashing,
CCOs offer, among other things, wire transfers, lottery tickets, payment for utility bills and
traffic citations,, and sales of public transit passes, all efficiently processed by very specialized
high technology equipment.
Table 2: RiteCheck Services, Fees and Technology
Service Fee Technology
Checks Cashed 1.4%
Money Orders $0.89 On line Delta Money Order dispenser
Authorized Agent -- Con Edison &
Verizon
Free or $1.00 CashPoint or Pay-O-Matic Bill
payment system (some are on line real
time, some are batch process.)
Almost all Utility / Telephone /
Cable Bills
$1.00 As above
EBT $1.50 Personal Teller Machine (PTM)
Parking Tickets $1.00 Electronic Batch Process
MetroCards No Fee
Western Union / Quick Collect Scaled fee Dedicated PC
ATM $1.50
PTM (Personal Teller Machine) $1.50 NYCE / Lynk / Chase Point of
Banking
Telephone Calling Cards Retail mark up
Lotto, Instant Tickets 6% state wide (all merchants) NYS provided on line lotto machine
PayNet Scaled fee On line (uses 2 bill payment systems
above)
Postage Stamps & Stamped
Envelopes
No mark up (free service to
customer)
Merchant Coin & Currency Sales $0.25 per roll, $1 per strap
The range of services offered by RiteCheck is characteristic of the check cashing industry and
offers many of the basic financial services low-income people need. Check cashers also tend to
be open longer hours in order to serve low-wage workers. For example, RiteCheck outlets are
open as early as 7:30 a.m. and close just before 6 p.m. on weekdays, and are open 8 a.m. – 1:50
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p.m. on Saturdays. Coleman says several CCOs in New York are now open 24 hours a day.
RiteCheck’s service menus are also available in Spanish, and the stores’ cashiers reflect the
language and culture of the neighborhoods where they operate.
Based on these factors of service, convenience, and comfort, check cashers perceive their
enterprises as uniquely suited to fulfilling the financial services needs of the poor and unbanked.
An indication of this perception is the recent name change of the National Check Cashers
Association (NaCCA), a trade association of CCOs, to the Financial Services Centers of America
(FiSCA). The industry contends that the check cashing business is the most logical and
appropriate model for drawing the unbanked population into the financial mainstream. That
argument is taken a step further by Coleman, who criticizes the basic assumption that bank
accounts are the best solution for meeting the financial services needs of the poor.
A fundamental point of Coleman’s argument is that transaction-based financial services, as he
calls check cashing, is more appropriate for low-income customers than the relationship-based
services of traditional banking. In his view, the conventional wisdom that bank services should
simply be shrunk to the scale needed by low-income individuals is inappropriate because it won’t
work for banks. The fact that smaller scale—a high volume of very small transactions—is not
viable for banks is a major reason banks have pulled out of low-income inner-city neighborhoods
in recent decades. Rather, Coleman points out, the check cashers’ business model
accommodates the needs of the working poor and is thus more viable. Indeed, Coleman
contends that CCOs are more economical for poor customers because they can pick and choose
the services they want and then pay for only those, rather than paying monthly fees for a bank
account, maintaining a minimum balance, and paying penalty fees for below-minimum balances
or bounced checks.
Further, Coleman says that the check cashing business exhibits three elements essential for the
long-term survival of institutions working to meet the financial needs of the poor: access,
liquidity, and service. Check cashers provide better access than banks by being open on a
schedule that suits the poor: before and after normal business hours and on Saturdays. They are
also located in neighborhoods where low-income people live and work. Check cashers provide
liquidity appropriate for people who live from paycheck to paycheck by paying immediate cash
rather than putting a hold on funds in a customer’s account until a cashed or deposited check
clears, as banks do. Check cashers provide service by taking time with individual customers, by
helping them conduct their transactions, and often by helping their large base of immigrant
customers overcome language barriers. This transaction-based business model, which depends
on volume, dictates that CCOs provide superior customer service so customers will keep coming
back and conducting more transactions.
Coleman suggests that financial services be viewed as a continuum rather than as discrete (bank
accounts versus no bank accounts). Check cashers can provide a place for immigrants and the
poor to get temporary, transitional financial help until they are ready for a relationship with a
bank. He suggests that check cashers can and should do more to meet the financial services
needs of these marginalized populations:
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What would be genuinely helpful would be a way of offering a few transitional bank-type
services through check cashing locations without abandoning the basic model of
transaction based fee for service. That would help those low-income customers who are
ready … make the transition from transactional financial services (check cashers) to
relational financial services (banking). I believe that the joint venture between check
cashers and credit unions may lead to the evolution of a new kind of creature that without
relying on charitable or government contributions, without requiring tax exempt status,24
can thrive while at the same time provide the financial services that the poor genuinely
need.25
The Business of the Partnership
As outlined briefly in the Introduction, the cooperative arrangement implemented in April 2001
between Bethex Federal Credit Union and RiteCheck Cashing consists of four provisions, with
two primary components. First, Bethex members are able to make deposits and withdrawals
through the check cashers’ Point of Banking (POB) terminals at no cost. These POB terminals
are essentially ATMs located within cashier windows, and customers and cashiers conduct
transactions jointly. POBs are part of the NYCE regional financial exchange network sponsored
by Chase Bank and are regulated according to the established network rules (see Sidebar 4).
Credit union members may also cash checks at participating check cashers without incurring a
fee. Rather, the credit union absorbs fees at an agreed-upon discounted rate different from the
maximum (1.4%) set by New York state law. In most cases, the resulting fee will be lower than
the state limit, although the fee depends upon the amount of the check. (See Table 2 and
accompanying footnotes.) It is the same fee structure that is extended to members of PayNet, a
cooperative network of check cashers that have established a relationship with New York–area
banks to cash payroll checks from some of the banks’ large clients. Bethex joined PayNet to
facilitate its participation in the pilot. As a result, checks issued by Bethex (e.g., loan checks)
and presented at participating check cashers are eligible for the PayNet rates. In addition, Bethex
members are able to cash payroll and other checks at participating CCOs for a 1.1% fee,
discounted from the statewide 1.4% rate.
Under the other major provision of the partnership, Bethex marketing materials will be available
in participating CCOs. A basic packet of information introducing the CU’s mission and services,
these materials will also contain applications for membership and loans that individuals may
complete and mail back or drop off at one of Bethex’s offices.
24 Community development credit unions like Bethex are tax-exempt nonprofit organizations, while check cashers
are not.
25 Interview conducted by case study author, January 22, 2001.
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Table 3: Partnership Fee Structure
Transaction Cost to CU Cost to Consumer Net to Check Casher
Withdrawal
$1.88 $0.00a $1.88
Deposit
$.70 $0.00 $.70
Check cashing (issued by Bethex) $0–
$600b
$4.50 $0.00 $4.50
Check cashing (issued by Bethex) $601–
$1,000
$5.50 $0.00 $5.50
Check cashing (issued by Bethex) over
$1,000
1% $0.00 1%
Check cashing (payroll and other checks) $0.00 1.1% 1.1%
a The check casher will surcharge as provided by NYCE network rules (currently $1.50). Bethex will pay $.38
interchange at time of transaction; customer will pay $1.50, which will be reimbursed by Bethex.
b In its six years of operation, the average PayNet check cashing fee works out to be less than the regulated rate of
1.4%. This is because most of the checks that find their way into the PayNet system are greater than $350. Since
most Bethex checks are loan checks, it is a certainty that the PayNet rates will fall below the regulated fee amount.
Why It Makes Sense
Check Cashers’ Perspective and Interests
The participating check cashers have two major business interests in the credit union partnership.
The first is expanding their customer base. Volume is critical to the check cashing business, so if
people can be drawn into CCOs with the offer of accessing their credit union accounts, they may
then take advantage of other services such as bill paying, money wire transfer, etc.
Partnership with a credit union allows CCOs to offer access to depository accounts, a service
that—without such an arrangement—would fall outside their legal range of activities. Coleman
views such a partnership as an opportunity both for customers and for his own business. In an
industry dependant on fee-based services geared mainly to low-income people with relatively
small transactions, expanding the volume of transactions is critically important. Coleman and
other check cashers hope that providing access to credit union accounts will draw more people
into CCOs, where they then may find it convenient to take care of other necessary financial
transactions and thereby boost the overall volume of the check casher’s business.
Credit unions seem a logical alliance for check cashers. Unlike banks, they are already present
and working in communities that are targeted by check cashers and thus offer a ready market for
check cashers’ convenient locations and hours. As indicated, Coleman and Cousminer
recognized early on that they share a common customer base.
Additionally, Bethex’s willingness to absorb fees incurred by its members’ use of banking
services made possible through the partnership allows check cashers, through POBs, to offer
services they otherwise could not, thereby increasing their overall walk-in business volume
without bearing the transaction costs for those additional services.
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The other reason check cashers want to align themselves with credit unions is public relations.
Coleman is a former president and active executive member of the Check Cashers Association of
New York (CCANY). During his tenure as president in 1994–95, CCANY developed a strategic
plan to guide the future direction of the industry in the state. That plan established three
principal goals:
1. grow the core business by increasing the volume of checks cashed
2. form strategic alliances with banks and credit unions
3. become electronic
During that same time, Neil Levin, New York State Superintendent of Banks, was looking for
innovative ways to draw the unbanked residents of low-income inner-city neighborhoods into the
financial mainstream. Levin talked with Coleman and other check cashers about becoming more
active in and integrated into the communities in which they operated, partly to improve public
relations. Check cashers, he believed, needed to overcome their predatory image and make
people more aware of the needed services they provide to low-income communities. Levin also
saw fuller integration into communities as good business for check cashers; it would help them
identify additional needs and the best ways to meet them.
The conversations with Levin struck a chord with Coleman, who regretted not being able to offer
customers who came into his stores to cash their paychecks the opportunity to put some of that
check away into a savings account and ultimately achieve longer-term economic improvement.
Credit Union Perspective and Interests
From Cousminer’s perspective, building the broadest possible membership base is necessary to
meeting Bethex’s mission of serving the poor and those without access to financial services in
the Bronx. A broader membership base also helps to make the credit union more viable and
sustainable. Philosophically opposed to charging fees to recover operating and transaction costs,
Cousminer believes organizations such as hers should make their money through the interest
spread on loans. Expanding their membership helps achieve this goal.
In order to expand membership, Bethex was interested in establishing branches but had little
money to do so. Cousminer, treasurer and manager of Bethex, thought of working with check
cashing facilities both because CCOs have an abundance of convenient locations in low-income
neighborhoods and because Bethex had done business with them in the past. In its first twenty
years of operation, Bethex used check cashers because it had no real ability to keep cash safely
and found that banks were rude and disrespectful to its members when they tried to cash their
Bethex loan checks. As a result, Bethex started to send “ok to cash” checks to check cashers
instead—an unofficial endorsement that signaled to the check casher that the checks wouldn’t
bounce.
Although Bethex was interested in branching to meet the banking needs of a broader segment of
poor households in the Bronx, it soon discovered that cost constraints were prohibitive. “To
build a branch, no matter how small, costs a lot of money, but there are check cashers on every
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corner,” Cousminer points out.26 She estimates that establishing a branch costs a minimum of
$200,000, plus all of the ongoing operating costs—salaries for three full-time employees would
run more than $60,000 annually, plus an additional $2,000 in bonding insurance beyond what
Bethex currently pays. Then there are operational costs such as telephones, computers, etc.
Paying a fee per transaction is comparatively negligible, Cousminer argues, and using check
cashers is the most efficient way of acquiring new deposits. In addition, for people who already
cash their payroll checks for free through the PayNet system, having access to credit union
accounts could help them save.
Cousminer also asserts that using check cashers is more efficient for Bethex’s members.
Because check cashers are so prevalent in low-income neighborhoods, CCOs are much more
convenient for many credit union members than a full-service bank branch, which may mean a
round trip of more than an hour and $3 or more in bus or subway fare. That round-trip fare often
has to be paid by a low-income single mother traveling with her children or with the children of
friends or family members who are in her care. Cousminer wants to help alleviate this time and
financial barrier to accessing traditional financial services.
Beyond these direct effects, the partnership also has the broader potential of fostering name
recognition both for Bethex and the credit union movement as a whole, positively impacting
marketing and outreach.
Community Benefits
From a broader perspective, the partnership offers expanded delivery of credit union services to
people who are currently unbanked, drawing more low-income people into the financial
mainstream by counseling them on saving money, establishing a credit record, and applying for
loans—thus helping them in a more fundamental way consistent with the credit union’s mission.
Providing low-income people access to basic financial services and thus entry into the economic
mainstream has broad societal benefits as well. As these people acquire savings and credit
history, they become consumers of additional goods and services, including more advanced
financial services such as mortgage loans.
Moreover, a credit union-check cashers alliance may offer a uniquely effective way to reach the
unbanked. In immigrant neighborhoods especially, many use check cashers because they have
an established relationship with them, trust them, and feel comfortable with them. Many also
turn to loan sharks when they need to borrow money (see Sidebar 5). By contrast, they mistrust
mainstream banking institutions. Many come from countries where financial services often were
corrupt or inflation very high, contributing to their mistrust of banks in general and possibly of
any authority system. As evidence of that mistrust, Former NY Superintendent of Banks Neil
Levin cites the failure of check cashing windows established by Chemical Bank in their
branches.
Mainstream banks are rarely present in poor neighborhoods anyway, but even when they are—
and even when they offer check cashing services—they are unable to attract low-income
26 Quoted in Lauralee Ortiz, “Small CU Plans to Use Check Cashing Outlets As Branches,” Credit Union Journal 4 ,
no. 44: 1.
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unbanked customers. Coleman says banks fail to recognize that it is not simply a matter of
services offered but of the more relaxed atmosphere in CCOs, somewhat like the difference
between a fast food outlet and a fine restaurant. Low-income people are comfortable going into
the lobby of a CCO in work clothes or with several small children, just as they would be going
into a McDonald’s. However, they do not feel comfortable walking into the lobby of a
mainstream bank in the same circumstances, just as they would be uncomfortable walking into a
restaurant and being greeted by a maitre d’.
Furthermore, Coleman says banks are unable to move past the relationship model of financial
services. Even for check cashing services, Chemical wanted people to complete a form and join
their “Checks to Cash Club”. He contends that check cashers’ transaction-based model appeals
to poor customers; they do not need or want a relationship with a bank until they have enough
income to keep some of it in a bank account. Until then, they do not want to provide personal
information or otherwise establish a relationship with a bank; check cashers, who do not collect
information, provide a level of comfort. It is hoped that this arrangement, by offering banking
services through the familiar surroundings of established neighborhood CCOs, will help poor
people make the transition to mainstream banking.
The Regulatory and Advocate Responses: The Issues Surrounding This Partnership of
“Strange Bedfellows”
After more than four years of planning the pilot and working with regulators to obtain
permission to enter into partnership, Bethex, and RiteCheck received letters of approval from the
National Credit Union Administration (NCUA) in December 2000 and from the State of New
York Banking Department (NYSBD) in February 2001. The proposed partnership raised a
number of concerns among regulators and credit union advocates, and the terms of the
partnership as approved are somewhat limited compared to the original concept. NYSBD, which
oversees the state’s CCOs, required that the check cashers involved provide monthly reports on
the volume of transactions and fees associated with the partnership, as well as thirty-day advance
notice of any changes in the services offered, the project’s operations, or the participating check
cashing establishments.27
In spite of the numerous reasons the partnership seems to make sense for the business of both
principals as well as the community, there are a number of issues, questions, and possible
negative outcomes arising from the credit union–check cashers partnership. These concerns fall
into three categories. The first is a set of broad policy issues related to an alliance of any sort
between the mission-driven credit union movement and check cashers, who are viewed among
many credit union and other social policy advocates as preying on low-income communities for
profit. The second is concern about possible expansion of the partnership to include other
features or additional credit union partners in other geographic locations. Finally, there are
questions about legal liability raised by check cashers conducting business on behalf of a credit
union.
27 Paul J. Fazio, Deputy Superintendent of Banks, State of New York Banking Department, letter to Gerald
Goldman, General Counsel, Check Cashers Association of New York, February 14, 2001.
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Public Policy Issues
Advocates such as the National Federation of Community Development Credit Unions
(NFCDCU) express a concern over whether the underlying mission of the credit union
movement is in fact being served by a credit union–check casher alliance. They worry that the
credit union “brand”—its image as a positive social force—may be damaged by affiliation with
an industry whose image is less than positive in terms of service to the disadvantaged.
Moreover, the heart of the community development credit union movement is member
education, with community empowerment the ultimate goal. Advocates doubt members will
receive the same (if any) education through check cashers.
One advocate argued that if the major motivation for partnering with check cashers was the sheer
prevalence of CCOs, which would enable low-cost CU branches, why not open branches in
drugstores instead, since they are also numerous and present less risk to the credit unions’ image
and less harm to its members.28 As Cousminer points out, however, there actually are very few
drugstores in the poorest neighborhoods of Bethex’s service area in the Bronx; they have been
forced to close because of repeated robberies.
On the other hand, by aligning themselves with institutions that have a positive social agenda and
image, check cashers may be able to improve their own image and parlay that into political
legitimacy. NFCDCU officials speculate that the move may be a calculated effort by check
cashers to elevate their public image as part of a broader attempt to legalize payday advance
lending, currently not allowed in the state of New York. Credit union advocates oppose it
because high fees are charged to borrow money for a short term; poor people frequently become
mired in debt when they are unable to repay the full amount borrowed in the specified brief
period of time. Because payday advance lending is illegal in New York, the credit union–check
casher partnership is able to work. However, the check cashers’ trade association is lobbying the
New York legislature to legalize payday lending. If this happens, advocates wonder about the
implications for the partnership.
NFCDCU officials worry that check cashers could even be employing a backdoor strategy to
become essentially unregulated banks, taking deposits and making loans. Credit union advocates
need to watch this partnership vigilantly, NFCDCU believes, and not lose their resolve in other
policy areas regarding check cashers just because they now appear to be “good guys.”
Partnership Expansion Issues
Considering all the positive impacts, this kind of partnership might work fairly well, NFCDCU
representatives point out, especially in a state like New York where check cashers are strictly
regulated. They are less certain, however, about expanding and transferring the partnership to
other states. In states where payday advance lending is allowed, partnership customers could be
confused between an application for a payday advance and one for a credit union loan. It is also
possible that people who go into a CCO intending to apply for a credit union loan might be
attracted by the immediacy of an advance and wind up in a debt situation that would be harmful
to their overall economic status. In such a case, the credit union could be seen as a pre-developer
28 John Reosti, “Teaming Up with Check Cashers,” American Banker, October 25, 2000, p. 1.
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of business for check cashers, rather than the other way around, and the credit union’s mission of
educating and empowering low-income individuals would be defeated.
Cousminer responds to this concern as well, arguing that the situation could be just the opposite:
that check cashers offering payday lending could actually serve as pre-developers of business for
their credit union partners. Given the choice between a payday advance and a credit union
consumer loan, she says, most individuals would be attracted to the credit union loan—especially
if the benefits are effectively marketed—because it carries availability of a larger amount, a
lower interest rate, and a longer pay-off term. In addition, Bethex’s small consumer loans are
typically available on a same-day basis, offering cash within twenty-four hours. Cousminer
points out that most people who use payday advances for emergency cash are probably in some
sort of financial distress and could actually benefit from a larger, longer term loan. A credit
union consumer loan can be a better solution to financial difficulties than a payday advance loan,
which in her view perpetuates the difficulties and gets a person into a deeper hole.
Additionally, there is the question of whether CUs have adequate infrastructure to handle the
additional demand for products and services generated by a partnership with check cashers.
NFCDCU officials acknowledge that Bethex is probably in a good position to handle the
increased demand for services but fear that smaller CUs may be overwhelmed. This raises the
issue of the need for oversight and coordination, particularly when viewing partnerships on a
broader scale.
Legal Liability Issues
With CCO employees being involved in CU members’ business, a number of regulatory issues
arise. The first and probably most significant issue is bonding. The National Credit Union
Administration (NCUA), which approved the pilot, instructed Bethex to discuss bonding
regulations directly with its bonding agency. Within the scope of the current agreement, bonding
is not an issue. However, if the partnership expands to include additional activities, such as
accepting account or loan applications, or disbursing loan checks, the bonding issue will need to
be reexamined.
Another issue for advocates is liability: Since CCO employees would be handling cash deposits
made by Bethex members, there was concern over who would be responsible if the money in the
cashier’s drawer did not match that handed over by the CU member. When a deposit is made, it
is punched into the POB terminal in the customer’s presence, the customer is given a receipt, and
the information is automatically transmitted to Bethex over the NYCE network. A legal opinion
by Steven Bisker, Bethex’s attorney and former general counsel for NCUA, delineates that
ultimate liability for end-of-day balance discrepancies lies with the bank as sponsor of the check
casher’s participation in the NYCE network:
RiteCheck’s participation in the NYCE network is based upon its contractual relationship
with Chase Manhattan Bank (“Chase”) as a “sponsored participant”. As a federally
insured depository financial institution participant in the NYCE network, Chase is
authorized by NYCE to sponsor participants into the network. As a sponsor, Chase is
liable to NYCE “and is obligated to accept settlement and billing, for the [t]ransactions of
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its [s]ponsored participants, and must ensure utilization of the NYCE Adjustment System
for each of its [s]ponsored [p]articipants.” In other words, Chase would be liable for any
shortfalls in RiteCheck’s network settlement account and for any failures by RiteCheck to
properly notify an issuing participant (e.g., the Credit Union) of any checks deposited by
cardholders (e.g., members) to their accounts that are returned for nonpayment.
…deposits made at a POB terminal in a shared EFT network are immediately credited to
the cardholders’ (e.g., members’) accounts at their respective financial institutions (e.g.,
credit union, bank, etc.). The terminal owner (e.g., RiteCheck) is required to have an
amply funded network settlement account sufficient to cover all of the deposits credited
to the cardholders’ accounts. In the case of RiteCheck, any failure on its part to have
sufficient funds in its settlement account would result in Chase being liable for such
funding.29
Any expansion of provisions in the partnership could trigger the issue of liability again. For
instance, in earlier versions of the partnership proposal, check cashing employees would be
allowed to help customers complete applications for new accounts or loans; the applications
would be submitted to check cashers and then forwarded to Bethex. For regulators, such a
provision raises concerns over whether check cashing employees are adequately trained or
skilled to meet the legal regulations imposed on credit unions, which include full disclosure and
truth-in-lending requirements. Coleman envisions the partnership eventually incorporating this
element, as well as a provision allowing check cashers to disburse loan checks. Since such
activities go beyond electronic transactions that are covered by the NYCE network operating
rules and backed by banks, such an expansion of the partnership would require additional
regulatory scrutiny.
Conclusions: The Regulatory Environment—Impact of Regulators’ Attitudes on the
Partnership
The reason for so much regulatory scrutiny and hesitation in this particular case, as opposed to
other partnerships involving check cashers, may lie more in perceptions about credit unions than
in those about check cashers. Community development credit unions are seen as performing a
service to disadvantaged people and communities, a positive good as opposed to a neutral entity
(like banks and convenience stores, for example). For this reason the community development
credit union sector is often referred to as a “movement.” It is possible that regulatory hesitation
to approve the alliance stemmed partly from fear of tarnishing the image of the whole movement
by sanctioning its partnership with check cashers. The corollary is an uneasy feeling of giving
check cashers an undeserved positive image via association with the CU movement. This is,
29 Steven R. Bisker, Attorrney, representing Bethex Federal Credit Union, letter to Layne Bumgardner, Regional
Director, Region I (Albany), National Credit Union Administration, December 12, 2000.
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perhaps, where much of the tension about the partnership rests and the reason for wanting to
limit it so significantly.
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Sidebar 1: Check Cashers’ Revenues and Profitability
Because most check cashing outlets
(CCOs) are privately owned, there is
little available information on the
industry’s revenues and profitability. A
study done by Dove Consulting for the
U.S. Treasury Department in 2000
provides a snapshot of the industry.
Surveying CCOs in four major
metropolitan markets —Atlanta, Boston,
San Antonio, and San Diego.1 Dove
found that annual revenues vary among
markets, from a little more than $84,000
in San Diego to almost $325,000 in
Boston.
Two-thirds of all revenues are derived
from check cashing fees, far exceeding
the second-place service, money
transmission (wiring money), at 18%.
Fees charged for money orders
contribute 10% of revenues. Overall,
loans comprise only 3% of revenues in
the four market areas studied. However,
San Diego is the only market included in
the study that allows payday advance
loans; there, loans represent 16% of
average store revenues. Two-thirds of
CCOs’ revenues pay for operating costs,
with salaries and payroll expenses
comprising the largest chunk at 27%,
followed by rent (11%), cash and money
services (9%), and bad debt (7%). In
terms of profitability, overall pretax
return on sales averaged 34% among the
surveyed stores. The study also found
that chain stores had higher average
pretax income than independent stores
($65,000 compared to $39,000).
1 Survey of Non-Bank Financial Institutions.
Dove Consulting, for U.S. Department of the
Treasury. April 4, 2000. Available at:
http://www.treas.gov/press/releases/docs/nbfirpt.
pdf.
Detailed financial information is
available for Ace Cash Express (ACE), a
publicly traded company that is one of
the largest in the check cashing industry.
ACE operates 1,200 stores (13% of
which are franchised) in thirty states and
the District of Columbia. Like most
check cashers, ACE offers an array of
transactional services, including short-term
consumer loans through a
partnership with California-based
Community West Bancshares.
ACE’s 2000 sales totaled $140.6
million, a 15% increase over the
previous year and nearly double its ten-year
average of $74 million. The 15%
increase was actually a bit of a decline
from the company’s ten-year average
annual growth of 24%. Net income
grew by just 7% in 2000, though its five-year
average growth in this respect is
36%. Company sales had profit margins
of 6.8% and 5.9% in 1999 and 2000,
respectively; reflective of the firm’s ten-year
average of 6%.2
ACE’s return on assets (ROA) and
return on equity (ROE) figures have
remained rather stable in recent years.
Its ROA was 4% in 2000, just down
from 5.7% in the preceding year and
4.8% in 1998.3 This is significantly
higher than the average ROA for the
nation’s largest 100 commercial banks,
which had average returns of 1.4% and
1.5% in 1998 and 1999.4 ACE’s ROE is
also comparable to that of large banks;
2 Ace Cash Express, Inc, 2001 Hoover’s
Company Profile Database–American Public
Companies.
3 Ace Cash Express, Inc. Disclosure Incorporated
2001 company report.
4Sheshunoff Information Services, data available
at http://www.americanbanker.com.
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its return has been consistently around
16.5%5 over the last three years, while
the average ROE of the twenty largest
commercial banks was 18.6% in 1999.6
5 Ace Cash Express, Inc. Disclosure Incorporated
2001 company report.
6 Michael Blanden, "U.S. Commercial Banks: A
Bumper Year But…" The Banker 150, no. 889
(March 1, 2000).
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Sidebar 2: Examples of Bank-Check Casher Partnerships
The move to paying government benefits
by electronic funds transfer has
increased a trend toward partnerships, as
check cashers seek to hold on to their
profits from cashing government checks
while banks eye government
beneficiaries as a pool of potential
customers. At the intersection of these
interests, several banks and check
cashers have formed partnerships to
provide complementary services. One of
the largest such partnerships was
established between the National Check
Cashing Association (NaCCA, now the
Financial Service Centers of America, or
FiSCA) and Citibank. In 1999, the
partnership unveiled a new electronic
product called the NaCCA Preferred
Card, which enables federal benefit
recipients to open a special Citibank
account into which their benefits will be
electronically deposited.1 They may
then access their benefits at any ATM or
participating check casher by using the
debit NaCCA Preferred Card. Fees vary
depending on the check casher; monthly
fees range from $3 to $6, with
withdrawals ranging from $1 to $4,
depending on whether customers access
their benefits at check cashers, ATMs, or
point-of-sale terminals.2
InnoVentry, a joint venture between
Wells Fargo and Cash America, owner
of pawnshops and CCOs, is developing
automatic tellers that cash paychecks for
people with or without bank accounts.
The terminals, called Rapid Pay
Machines (RPMs), are essentially ATMs
1 “NaCCA Announces New Debit Card
Program,” NaCCA/FiSCA press release, January
11, 1999, available at
http://www.nacca.org/pr6.htm.
2 “NaCCA Preferred Card…Pilot Program
Announced,” NaCCA Currents (July 1998): 2.
that rely on face-recognition technology.
The earliest RPMs were located in
convenience stores, discount stores such
as Kmart, and some Kroger
supermarkets. In May 2000, InnoVentry
announced an agreement with Diebold to
place similar machines in bank lobbies
to enable unbanked employees to cash
their payroll checks without having to
stand in the teller lines; this would cut
down on per-transaction costs for the
banks.3
These examples highlight banks’ desires
to tap into and profit from the unbanked
market without having to serve poor
people directly, without having them
stand in bank lobby lines, and without
providing them access to mainstream
financial services.
Other banks have elected to create their
own freestanding check cashing
operations. In an effort to become the
principal financial services provider in
the United States, Banco Popular
established its own check cashing arm,
Popular Cash Express (PCE), in early
1998.4 PCE offers services typical of
check cashing outlets as well as some
expanded services, such as insurance and
travel services, and is exploring offering
credit cards and personal loans. As of
late 2000, PCE operated seventy-five
retail financial service centers in New
3 “InnoVentry and Diebold Form Marketing
Alliance to Bring Banks ATM Check Cashing
Solution for Non-Account Holders,” Business
Wire, May 17, 2000.
4 Jose Riera, “Banco Popular and Popular Cash
Express: Providing Financial Services to the
Unbanked,” Community Developments
(Community Newsletter of the Office of the
Comptroller of the Currency, U.S. Department of
Treasury), Fall 2000, p. 11.
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York, California, Texas, Arizona,
Florida, and Washington, D.C.
Westamerica Bancorp started its own
chain of check cashing outlets, called
Money Outlet Inc., in late 2000. The
northern California stores are cashing
checks and selling money orders
exclusively but plan to expand to other
typical CCO services if they do well.
Westamerica’s relationship between its
two businesses is virtually the polar
opposite of Banco Popular’s.
Westamerica is not marketing bank
accounts to Money Outlet customers; in
fact, signs advertising the CCOs do not
even acknowledge an affiliation with the
bank. This separation is deliberate;
Westamerica officials say they view
check cashing as a completely different
market that is not served by banks. This
distinction makes perfect business sense
to one investment analyst, who thinks
Westamerica is wise to protect its
reputation as a leading small business
lender: “Check cashing is a different
type of business, with a down-market
customer who has a very different set of
financial needs. You don’t want to mix
those brands, or you risk diluting the
value of your brand.”5
Union Bank of California, the state’s
third largest commercial bank, also has
entered the business. Its Cash & Save is
a hybrid program that goes beyond
check cashing by using education and
consulting services to encourage those
accustomed to using check cashers to
transition to traditional banking services.
Begun at its Hawthorne location in
south-central Los Angeles in 1993, Cash
5 R. Jay Tejera, senior analyst, Ragen
MacKenzie, quoted in Katie Kuehner-Hebert,
“California’s Westamerica Enters Check-
Cashing Biz,” The American Banker, November
16, 2000, p. 1.
& Save provides a full range of services
targeted to lower-income, ethnic markets
with large contingents of unbanked
workers. While each location provides
basic check cashing services—at lower
fees than those generally charged by
CCOs—what distinguishes Cash & Save
is the range of banking services it
provides. These include a discounted
rate for buying a money order “plan”
(six free money orders per month plus a
1% check cashing fee), no-fee low-minimum-
balance basic checking and
savings accounts, a secured credit card,
and direct deposit for electronic delivery
of government benefits. The bank
estimates that 40% of Cash & Save’s
repeat customers had transitioned to
traditional banking products such as
checking and savings accounts by late
2000.6
In addition to its own check cashing
outlets, Union Bank has entered into an
alliance with Nix Check Cashing and
Operation HOPE, Inc., a community-based
nonprofit, to provide financial
services in inner-city Los Angeles
neighborhoods. Under the terms of the
agreement, Union Bank acquired a 40%
stake in Nix’s parent company, Navicert
Financial, Inc., with an option to acquire
the remainder of the company in ten
years, during which time Union Bank
will give 5% of the company’s equity to
Operation HOPE.7 Through
participating Nix outlets, Union Bank
offers applications for home mortgage
loans, credit cards, checking and savings
accounts; a dedicated phone line with
6 “Banking, Financial and Educational Services
Offered At Nix Check Cashing Stores,” Business
Wire, September 28, 2000.
7 “Unique Venture Teams Nix Check Cashing,
Union Bank of California and Operation Hope;
‘We’re Bringing Banking Back to the Inner
City’,” Business Wire, March 16, 2000.
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access to a customer service
representative; a full-service ATM with
no surcharge for nonbank customers;
and small business loan and deposit
services. For its part, Operation HOPE
offers mortgage assistance, consumer
and business credit education
information through brochures, and a
direct phone lineto get information about
and register for these financial education
opportunities. . The partnership, seen by
Union Bank as a way to provide poor
people with a bridge into the financial
mainstream, was implemented at three
Nix stores in July 2000; the partners
anticipate expanding the services to all
forty-seven Nix outlets over the next two
years.8
Union Bank’s approach does not give
low-income individuals access to the full
range of mainstream financial services
offered by the bank. While each Nix
store in the pilot has a teller window
bearing a Union Bank sign, the teller’s
job is to help people open Union Bank
accounts and to direct them to
information and automated services
nearby. Basic banking transactions such
as deposits, withdrawals, and check
cashing, even for Union Bank
accountholders, are only available
through the Nix windows, at the check
casher’s normal rates. This situation
leads some advocates to criticize Union
Bank for continuing to relegate low-income
neighborhood residents to
second-class financial services.9
In response, Union officials point out
that the bank is legally restricted from
offering teller transactions through Nix
8 “Banking, Financial and Educational Services,”
Business Wire.
9 Laura Mandaro, “Union Bank, Check-Casher
Team Up,” The American Banker, September 25,
2000.
outlets.10 Beyond that limitation,
however, turning Nix offices into Union
Bank branches runs counter to the model
the bank is pursuing, at least in the short
term. The bank’s experience has
demonstrated that it is difficult for new
branches in low-income neighborhoods
to generate the volume of accounts
necessary to sustain themselves. In the
Nix partnership, Union has chosen to
build on a fully financed and functioning
platform so that the expected slow
growth in accounts is offset by the
revenues from typical check cashing fees
provided by Nix.11
10 Union Bank invested in Navicert without
regulatory approval, taking advantage of the
Gramm-Leach-Bliley Financial Modernization
Act of 1999, which eliminated barriers to banks
owning other financial businesses.
11 Ibid.
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Sidebar 3: What Is a Community Development Credit Union?
A credit union is a nonprofit,
cooperative financial institution.
Members (the equivalent of depositors to
a bank) are the shareholders: They own
the credit union and govern its
operations. Credit union membership is
restricted to a specific “field of
membership,” which may be based on
where the members live, the company
for which they work, or the organization
to which they belong.1
A community development credit union
(CDCU) is a geographically-based
cooperative established by people in
low-income communities as a way to
pool their savings and make loans to
each other. CDCUs are driven by a
mission of reinvesting in distressed
neighborhoods and communities and
empowering poor families to become
economically self-sufficient. To meet
this mission, CDCUs provide basic
financial services at low costs and access
to credit to traditionally underserved
populations.
Like all credit unions, CDCUs are:
• democratically controlled
• nonprofit
• insured and government
regulated
• operated by volunteer boards of
directors
CDCUs are distinct in their mission of
serving low-income communities.
Federal law and regulations support the
CDCU mission by allowing these
institutions to raise deposits and capital
1 “Credit Unions and Banks: What’s the
Difference?” available at the Bethex Federal
Credit Union web site,
http://www.bethexfcu.org/difference.htm.
from nonmembers, including
foundations, banks, faith-based
institutions, and other social investors.
CDCUs as a whole are often referred to
as a movement because of their mission-driven
orientation and because they have
created a national organization to
advocate on poverty issues as well as on
policies that impact their operation.
There are nearly 200 CDCUs serving
urban and rural communities in forty
states, spanning a broad spectrum of age,
size, and operational sophistication.2
The movement began fifty years ago,
with the first CDCUs organized to
combat lending discrimination. The
most recent ones were created in the
1990s to meet the financial service needs
in neighborhoods where banks had
downsized and closed branches.
Some CDCUs offer basic services one or
two days a week in community facilities,
such as church halls. Others have
modern, full-service facilities, complete
with ATMs.
All CDCUs offer small consumer loans.
Some provide financing on a larger scale
for housing, small and minority-owned
businesses, and nonprofit organizations.
While providing their members capital
for immediate needs, such as medical
bills or a car to reach a distant job,
CDCUs also help members save and
borrow for long-term goals, such as
buying a first home, starting a small
business, or getting a college education.
2 “What are CDCUs?” Available at the National
Federation of CDCUs web site,
http://www.natfed.org/Home.html.
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Sidebar 4: Point of Banking Terminals – A Critical Technological Link
Check cashers’ ability to accept deposits
from Bethex Federal Credit Union
members is clearly the most critical
feature in making this alliance unique
and innovative. That ability is made
possible by a financial transactions
terminal called a Point of Banking
(POB) terminal, found in RiteCheck and
several other check cashing outlets in
New York. Because of the critical role
the POB plays in making banking
services available through CCOs, it is
important to understand its operation and
implications.
What Is a POB?
In simplest terms, a POB is an ATM
without a cash dispenser. It looks and
functions in a manner very similar to
Point of Sale (POS) terminals used in
retail establishments to receive
electronic payments. The POS is
generally offered as a convenience to
customers, and a merchant pays a fee
(which is not passed on to customers) to
route transactions over the POS network.
POBs provide consumers with remote
access to banking services and initially
were developed cooperatively by Chase
Manhattan Bank, the NYCE network,
and the check cashing industry in 1994.
In their first incarnation, POBs could
perform cash withdrawals, transfers
between accounts, and balance inquiries;
they have expanded to accept deposits as
well, a feature that RiteCheck president
Joe Coleman refers to as a quantum leap.
In his words, “The deployment of POBs
will enable ... storefront service centers
(licensed check cashing outlets…) to
offer banking products, from a variety of
banks, in a convenient and cost effective,
neighborhood setting.”1
The Nuts and Bolts: How Do POBs
Function?
A check cashing business wanting POB
terminals enters into an agreement with
Chase Manhattan Bank to deploy one or
more POB terminals in a location.
Chase sponsors the CCO in the NYCE
network, with which Chase has a
contractual agreement.
Here is how a deposit transaction works:
1. Customer enters CCO with a $200
payroll check from Employer Y and
a debit ATM card from Bank X.
Customer wishes to deposit the
money from her payroll check into
her checking account at Bank X.
2. Customer approaches one of the
cashier windows, tells the cashier
what she would like to do; she first
cashes her check and receives
$197.80 cash ($200 less the 1.1% fee
for credit union members as part of
the terms of the pilot partnership
detailed in this case).
3. To deposit the cash, customer next
swipes her card and enters her
personal identification number (PIN)
into the POB.
4. Cashier enters the appropriate
information into the POB.
5. The POB routes this information via
the phone line through the NYCE
network to Bank X’s computer.
6. Bank X sends back a confirmation
that $197.80 has been deposited into
1 Joseph Coleman, “Introducing Point of
Banking,” Document used as handout/primer for
CCANY members, undated.
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the customer’s Bank X checking
account, and the POB prints a
receipt, which the cashier hands to
the customer.
7. The customer can also purchase a
money order, pay a bill, or receive
part of her paycheck in cash in the
course of this exchange. These
transactions would simply be
deducted from the amount deposited,
and this information would be
reflected on the receipt the customer
receives. Combining steps allows
customers to conduct multiple
transactions at one place, which is
different from (and, perhaps, more
convenient than) ATMs. So, instead
of taking a payroll check to a CCO,
buying a money order, getting the
remainder in cash and then taking the
cash to an ATM for deposit, the
customer is able to perform all steps
at one cashier’s window.
The customer receives a printed receipt
confirming that the transaction has been
recorded in her bank or CU account. If
the cashier’s drawer does not reflect the
deposit at the end of the day, the liability
lies with the check casher and,
ultimately, with Chase as the sponsor of
the check casher in the NYCE network.
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Sidebar 5: Poor and Immigrants Turn to Loan Sharks for Debt Capital
Community development credit unions such
as Bethex must compete with a way of
borrowing that is entrenched in mostly poor,
immigrant neighborhoods in New York and
across the country—loan sharking. Loan
sharks are informal lenders who provide
debt financing to poor people, often to start
small businesses. While New York law caps
annual bank loan interest at 25% and
person-to-person loans at 16%, the loan
sharks’ typical going rate of 2% to 5%
weekly amounts to 104% to 260%
annually.1
The ability of these illegal lenders to thrive,
even in communities where mainstream
banks are present, is a result of a
combination of cultural factors. Many
Latino borrowers come from countries
where the poor usually do not have access to
banks and have little money to save. Illegal
immigrants particularly fear banks because
of questions about their immigration status.
They can’t get a bank account without a
Social Security number, so they don’t go to
banks for fear of being discovered and
deported. Often, they do not keep the
financial records necessary to apply for a
commercial loan. Moreover, loan sharks
tend to make loans more quickly, ask fewer
questions, and be more understanding about
a borrower’s inability to pay.
Modern-day loan sharks are not linked to
organized crime and do not use threats or
coercion to force repayment. Instead, they
tend to secure collateral to seize if the loan
fails—often the property the borrower is
trying to lease or buy. Some will hold
jewelry or watches or the borrowers’
immigration papers until the loan is repaid
1 Dexter Filkins, “In Some Immigrant Enclaves, Loan
Shark Is the Local Bank,” New York Times, April 23,
2001, Section A, p. 1.
and as insurance that the borrower does not
disappear.

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Stegman, M. and Lobenhofer, J. (August, 2001.) Bringing More Affordable Financial Services to
the Inner City: The Strategic Alliance between Bethex Federal Credit Union and RiteCheck
Cashing, Inc. Chapel Hill, NC: Center for Community Capitalism.
Bringing More Affordable Financial Services to the Inner City:
The Strategic Alliance between Bethex Federal Credit Union and
RiteCheck Cashing, Inc.
A Case Study
by
Michael A. Stegman∗
and
Jennifer S. Lobenhofer#
Center for Community Capitalism, in the
Kenan Institute of Private Enterprise
University of North Carolina at Chapel Hill
August 2001
∗ MacRae Professor, Public Policy and Business, and director of the Center for Community Capitalism, University
of North Carolina at Chapel Hill
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1
Introduction
This case is an examination of an innovative corporate-community development alliance. It
involves a cooperative program between a community development credit union, Bethex Federal
Credit Union, and licensed check cashing outlets (CCOs) in the Bronx, New York. RiteCheck,
which owns eleven check cashing locations in inner-city Bronx and Manhattan neighborhoods,
has taken the lead among New York check cashers in building this partnership. A RiteCheck
store is the first CCO involved in the pilot, and other RiteCheck locations will become involved
as the project grows. Other check cashing firms have expressed an interest in participating, and
it is anticipated that, when fully operational, the pilot will involve 14 CCOs owned by as many
as three firms.
The pilot project was implemented in April 2001 after more than four years of planning.
Because it has only been in operation for a short while, all of the benefits of the partnership as
discussed here are projected. There has not yet been time to assess the results of the
arrangement, but because it is both unusual and cutting edge, it bears examination, as it exhibits
several promising features of ‘win-win’ practices. Moreover, despite the fact that the concept
offers expanded business opportunities for both partners as well as increased access to basic
banking services for people in low-income neighborhoods, it is not without its critics and
controversy. These concerns—the reason the concept took so long to become reality—will be
discussed in the case as well.
Having realized that they share a customer base that is chronically underserved by other financial
institutions, each of the principals in this case was already thinking of the other as a partner by
the time they met in 1997 and began discussions. The express purpose of the strategic alliance is
to make credit union services more accessible to lower income consumers living within the credit
union’s field of membership.1 The partners hope that the capability to make deposits through a
check cashing outlet, as well as the presence of credit union marketing materials in those outlets,
will encourage check cashing customers who do not have bank accounts to open credit union
accounts and thus become part of the financial mainstream. The partnership is also a strategy by
an innovative credit union to increase its branch presence in underserved neighborhoods without
incurring the expense of acquiring or building additional bricks-and-mortar facilities.
In fulfilling a branch role for the credit union, check cashers hope that the availability of deposit
services will increase the walk-in traffic and thus expand the overall volume of transactions upon
which their business depends. By allying themselves with an organization whose mission is to
serve the needs of a low-income population, they also hope to improve their overall standing in
the community and at least partially overcome the negative perception of their industry held by
advocates for poor communities.
Technology is another critical feature of this partnership. Strategic alliances such as this one
would not be possible without sophisticated technology and networks for conducting a variety of
financial transactions. Today, the most advanced check cashing operations have access to the
# Senior Research Associate, Center for Community Capitalism, University of North Carolina at Chapel Hill
1 Bethex is a community development credit union with a geographically defined field of membership in the South
Bronx.
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2
same technology and Automatic Teller Machine (ATM) networks that mainstream banks use.
Indeed, RiteCheck has access to better technology than does Bethex, and the fact that RiteCheck
can offer additional services to members is part of the advantage to Bethex in using CCOs as
branches.
The Context
The partnership between Bethex Federal Credit Union and New York check cashing firms is
particularly interesting because it taps into a number of concurrent trends in the financial services
industry and public policy. Utmost are the recognition that low-income families need to build
assets in order to break the cycle of poverty common in many inner-city communities and the
corresponding effort to help them accumulate those assets by providing better access to banking
services. Such services are often missing in inner-city neighborhoods because banks have found
it unprofitable to operate branches with a large volume of small transactions.
The second financial services trend important to this case is the growth of the check cashing
industry and the issues surrounding it. Check cashers have identified and filled a niche market,
providing a variety of financial services to a primarily minority, urban, largely unbanked
customer base. The industry is controversial, however; advocates for the poor have criticized
its fee structure as harmful to the low-income communities in which CCOs primarily do
business. So when a community-based financial institution (the credit union) sought out a
strategic alliance with the perceived “enemy,”—swimming with the sharks, if you will—
eyebrows were raised.
Yet partnerships between check cashers and more mainstream financial institutions are becoming
more common, a trend that represents the third critical piece of backdrop for this case.
Increasing competition in the banking industry and saturation of middle-class suburban markets
have led banks to try to develop new markets in inner-city neighborhoods. Still reluctant to
establish full branches in low-income neighborhoods, however, banks have sought various types
of alternative alliances with check cashers. This has blurred the lines between the two industries,
as banks come to look more like check cashers and vice versa.
The Need for Basic Financial Services
Despite the longest economic expansion on record and the lowest unemployment rates in a
generation, 10% of all American families have no bank accounts. This includes 25% of African
Americans and Hispanics, one-fourth of all families with incomes under $20,000, and nearly half
of all families moving from welfare to work.2 In recent years, advocates and policymakers have
grown to understand that bringing the unbanked into the financial mainstream is important,
because one’s banking status has profound implications for long-term family self-sufficiency.
“Even controlling for income and other factors, low-income individuals with bank accounts are
43% more likely to have positive net financial assets than those without.”3 Lack of savings is
particularly important to low- and moderate-income families in general and to unbanked families
2 Federal Reserve, 1998 Survey of Consumer Finances. http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.
3 U.S. Department of the Treasury, “The First Account Initiative: Bringing the “Unbanked” into the Financial
Services Mainstream,” December 16, 2000.
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in particular, because they are much less likely than other households to be covered by a
retirement plan at work. In 1998, more than nine out of ten (92%) unbanked families were
without a retirement account, compared with less than half of banked families (47%). Indeed,
for more than half of the unbanked (54%), their only asset is their car.4
At least part of the reason so many American families do not have bank accounts is the simple
fact that there are no banks in the neighborhoods where they live. Because of mergers and
increased competition from nondepository institutions, the number of financial institutions in the
United States has declined significantly. Between 1975 and 1995, the number fell from about
18,600 to 12,200, a decline of about 35%.5 Continuing to fall steadily through the late 1990s, the
number dipped below 10,000 by the end of 2000, representing an additional 17% decrease over
the six-year period.6
A decline in the number of banks does not automatically lead to a loss in local banking offices.
During the same 1975–95 period, the total number of branch offices increased by 29%, with an
additional 10% growth by 2000, but virtually all of this growth occurred in middle-income
areas.7 In contrast, low-income neighborhoods saw a 21% decline in branch facilities.8 While
nationwide branches were growing, New York State underwent a small (3%) decline between
1995 and 2000.9 Within New York City, however, Brooklyn lost around 14% of its bank
branches between 1978 and 1995 and the Bronx about 20%; a disproportionate share of these
closings occurred in the poorest neighborhoods.10
The Rise of the Check Cashing Industry
While the number of banks is decreasing, providers of alternative financial services are growing.
With an estimated $200 billion in annual transactions, this fringe banking industry—which
delivers a host of financial services from cashing checks to issuing money orders and short-term
“payday loans”—is both very big and highly profitable (see Sidebar 1).11 Payday lending, also
called payday advance (or deferred deposit by the check cashing industry) allows a customer to
receive a small, short-term loan against his or her next paycheck. The customer writes a personal
check for the advance amount plus a fee, in exchange for cash in the amount of the advance. The
lender agrees to hold the check for a specified period of time, usually about two weeks, at the
end of which the check is deposited or the customer returns with cash to reclaim the check.
4 Federal Reserve Board, Survey of Consumer Finances (1998) and calculations by the authors.
5 Robert B. Avery, Raphael W. Bostic, Paul S. Calem, and Glenn B. Canner, “Changes in the Distribution of
Banking Offices,” Federal Reserve Bulletin 83, no. 9 (September 1997, online).
6 FDIC Statistics on Banking, http://www.fdic.gov/bank/statistical/statistics/sectionb.html.
7 Avery, et. al, “Changes in Distribution,” 2, 18; FDIC Statistics on Banking,
http://www.fdic.gov/bank/statistical/statistics/sectionb.html.
8 Avery, et. al, “Changes in Distribution,” 2, 18.
9 FDIC Statistics on Banking.
10 Louis Jacobson, “Bank Failure: The Financial Marginalization of the Poor,” The American Prospect, no. 20
(Winter 1995), p. 8.
11 Scott Shepard and Elliot Jaspin, “An ‘Unholy Alliance’? Check Cashers and Banks Seen Profiting in Paperless
Era,” Philadelphia Inquirer, September 28, 1998, online.
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The core of the fringe banking industry is the network of stores across the country that classified
their primary business as check cashing. In 2000, this numbered an estimated 9,500, up from
7,100 just two years earlier; another 1,300 stores listed check cashing as their secondary line of
business.12 All told, the industry cashes more than 180 million checks a year,13 with a total face
value of $60 billion, producing about $1.5 billion in fees.14
The industry’s growth has been reflected in the New York metropolitan area. Between 1995 and
1999, the number of check cashing stores in New York City rose 11%.15 The New York State
Banking Department indicates that the city’s CCOs cashed more than $14.5 billion in checks in
1999, up from $11.4 billion two years before. During the same period, annual net income for the
industry rose from $3.7 million to $11 million.16
In contrast to conventional banks, CCOs historically have been concentrated in inner cities rather
than outlying urban areas and suburbs, although this is changing.17 Many check cashers are now
establishing locations in suburban strip centers where banks have closed.18
Because they do not have the stand-alone buildings and big lobbies, CCOs have lower facility
costs, enabling them to survive in areas where banks have struggled.19 Surveys also suggest that
“customers are satisfied with the services they receive from check cashers, which include
convenient locations, flexible hours, short lines, ancillary services such as bus passes and lottery
tickets, and, perhaps most important, immediate cash without waiting for a check to clear.”20
Market research by mainstream banks such as Chase Manhattan confirm check cashers’
competitive advantages. Chase’s Kenneth Rosenblum points out, “Check cashers are far
superior to banks in terms of the days and hours they are open for business and their ease of
access.”21
Bank–Check Cashing Partnerships
Technology and competition have prompted banks to rethink their use of traditional branches
and begin forming partnerships with third parties to deliver financial services without heavy
investments in bricks and mortar. Banks are looking to supermarkets, high-volume discount
stores, community development organizations, and check cashers to provide cheaper locations
and greater expertise in reaching consumers they have been unable to reach in the past.
12 Data from InfoUSA, cited in Survey of Non-Bank Financial Institutions. Dove Consulting, for U.S. Dept. of the
Treasury. April 4, 2000. Available at: http://www.treas.gov/press/releases/docs/nbfirpt.pdf.
13 “Q&A – NaCCA Facts,” National Check Cashers Association website http://www.nacca.org/q&a.htm.
14 Survey of Non-Bank Financial Institutions.
15 Richard A. Oppel Jr., “The Stepchildren of Banking,” The New York Times, March 26, 1999, sec. C, p. 1.
16 Heike Wipperfurth, “Check Cashers Buff Up Image,” Crain’s New York Business, November 27, 2000, p. 3.
17 Caskey, Fringe Banking, 63.
18 Joanne Gordon, “The Service Side of Strips,” Chain Store Age (February 1998): 136.
19 Stephen Wolf, Board Chairman for National Check Cashers Association, written comments to U.S. Department
of Treasury on interim EBT rule, 61 Fed. Reg. 39253, November 25, 1996.
20 Louis Jacobson, “Bank Failure: The Financial Marginalization of the Poor,” The American Prospect, no. 20
(Winter 1995), pp. 63-70.
21 Financial Access in the 21st Century, proceedings of a forum held on February 11, 1997 (Office of the
Comptroller of the Currency), p. 46.
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Economics and policy shifts have also led check cashers to seek out alliances with banks. The
transition to electronic funds transfer (EFT) for delivery of welfare and Social Security benefits
is reducing the volume of checks that need to be cashed, making check cashing a roller-coaster
business. When New York replaced its electronic vouchers redeemable only at CCOs with debit
cards that can be used at ATMs in 1999, the check cashing industry lost 20% to 30% of its
income.22 Seeking secure, steady business to make up for the loss of this previously assured
volume, check cashers are forming alliances and serving an outsourcing role for banks.
Partnerships between banks and check cashers are blurring the lines between mainstream
financial institutions and so-called “fringe banks,” which operate without either significant
consumer protections or community reinvestment obligations. As traditional financial
institutions move to a fee-based services system and fringe banks adopt increasingly
sophisticated technology and broaden their market appeal, banks are beginning to look more like
check cashers, and check cashers more like banks. Proponents say these new alliances will
provide more reasonably priced basic financial services to the unbanked and underserved, while
critics predict that the alliances will only further exploit the poor and the debt-ridden.
Ultimately, the value of these initiatives to society will depend in large part on whether they help
the unbanked (as well as those who have abused, or been abused by, the consumer credit system)
establish credit ratings so they can enter the financial mainstream.
Bank-check casher cooperative arrangements take a variety of forms (see Sidebar 2). Many
banks have teamed with CCOs to offer complementary financial services. Others have chosen to
compete head-to-head with check cashers by creating their own check cashing arms as a means
to tap into the unbanked market and to generate brand recognition and loyalty among unbanked
customers. Some arrangements are explicitly intended to serve as stepping-stones to mainstream
banking.
Few bank partnerships, however innovative, use check cashers as a portal to their services or
make an overt effort to provide a bridge into the financial mainstream for low-income unbanked
customers. This highlights the uniqueness and significance of the partnership between
RiteCheck and Bethex Federal Credit Union, a financial institution whose core mission is
economic empowerment.
Bethex Federal Credit Union
In 1970, an adult education teacher named Joy Cousminer recognized her students’ need for
economic empowerment and began working with them to establish a cooperative credit union.
The result was Bethex Federal Credit Union, a federally insured community development credit
union (CDCU) (See Sidebar 3). Today Bethex’s mission remains the economic empowerment
of low-income individuals and households in the Bronx. Outreach has always been implicit in
that mission, as Bethex strives to serve the maximum number of poor residents as possible.
As a result of its outreach efforts, Bethexhas grown from its original 600 members to nearly
8,000, and is continuing to add more than 1,000 new members per year. Bethex currently has
22 Manny Levy, president of the 16-store N.Y.C. Check Express Inc., quoted in Wipperfurth, “Check Cashers Buff
Up Image,” p. 4.
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assets of $8 million, dramatically less than the typical assets for a mainstream bank. In New
York, banks average $298 million in assets per branch.23 This gap highlights Bethex’s need to
use its assets efficiently while expanding its membership reach—just as it is seeking to do
through partnership with check cashers.
Bethex has one main office/service center that operates six days a week and two full-service
branches. One, the Roberto Clemente Credit Union, was acquired in the summer of 2000. Two
additional full-service branches, one in the Hunts Point neighborhood and the other in the Mott
Haven neighborhood, were due to become operational in May 2001. For the Hunts Point branch,
Bethex partnered with the Hunts Point Economic Development Corporation and a coalition of
local businesses. The Mott Haven branch received a boost in the form of a $200,000
construction and operating grant from the New York Empowerment Zone Corporation. Also in
May 2001, Bethex was in the process of acquiring the Columbia-Barnard Credit Union, which
was anticipated to bring an additional $1.5 million in assets and nearly 1,000 members under the
Bethex umbrella. When fully operational, these will be full-service branches open five days a
week; the Mott Haven branch will offer the added convenience of a 24-hour, wall-through ATM.
The CU also provides service to members one or two days a week at six “teller stations” located
in churches, a senior citizens center, and an animal hospital. Bethex also has a high
concentration of phone and mail transactions. The majority of Bethex’s clientele (60%) are
welfare and SSI recipients and senior citizens; the remaining 40% are generally low-income
earners who do not work for a specific employer and thus do not have payroll deductions or
direct deposit contracts.
Bethex’s commitment to expand in order to serve low-income residents is reflected in its
innovative ways of doing business. To keep lending rates and service fees as low as possible,
Bethex accepts donated equipment from banks and larger credit unions and relies on rent-free
office space. Bethex has moved so many times in its thirty-year existence that members once
called it “Gypsy Federal.” The CU also pays lower employee salaries than other comparable
institutions. Cousminer feels that minimizing costs and passing the savings along to members is
an integral part of its goal, to economically empower its members.
Bethex’s Goal Saver account/loan program is designed for people who have difficulty saving
money but are accustomed to repaying loans. A member establishes a goal to reach in a
specified period of time, and Bethex puts in the goal amount in the member’s Goal Saver savings
account, which earn 3% interest—1% higher than most of Bethex’s accounts. The accountholder
then pays an agreed-upon amount monthly to pay off the loan at 6%. Withdrawals from the
account can only be made for the amount of equity that has been accrued. This program helps
people build credit and develop the habit of saving and making monthly payments and prepares
them to borrow on a larger scale. .
Bethex offers a 2% dividend on accounts. Mortgages are available through a partnership with a
New Jersey credit union. Bethex makes consumer loans up to $10,000 and is a Small Business
Association (SBA) guaranteed lender for small business loans—currently the only small CDCU
in the country with this designation. The relationship took five years to set up, but Cousminer
23 FDIC Statistics on Banking, http://www.fdic.gov/bank/statistical/statistics/sectionb.html.
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says the SBA is now considering designating fifty other small CDCUs. Bethex markets its SBA
loans through local small business centers and community colleges. Bethex’s complete rates and
fees are shown in Table 1 below.
Table 1: Bethex Federal Credit Union Fee Schedule
Service Rate/Fee Notes
Lending
Personal/Consumer loan 16.5% Unsecured, can be taken out for an unspecified purpose; often used
for emergencies
Special purpose loan 15% Short-term, taken out for purposes such as paying taxes; typically
extended to someone who already has a loan outstanding with
Bethex, but is sometimes used to attract new members or start a
payroll deduction
Business purpose or good
debt consolidation loan
11.75%
Car loan 8%
IDA and Goal Saver 6%
Savings
All share accounts 2% quarterly
CDs 5% One-year minimum, including IRAs; $3,000 minimum balance
Goal Saver account 3%
Services
Membership $5 One-time fee
Membership cancellation $5 Exception in case of death—no fee
Returned check $15
Checking account $3/month Unlimited checking
Money order $1
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RiteCheck Cashing
Joe Coleman manages eleven RiteCheck check cashing outlets in the Bronx and Manhattan. His
stores exemplify the model of a volume-based, a la carte, fee-for-service transaction business
functioning as a one-stop shop for a variety of financial services. In addition to check cashing,
CCOs offer, among other things, wire transfers, lottery tickets, payment for utility bills and
traffic citations,, and sales of public transit passes, all efficiently processed by very specialized
high technology equipment.
Table 2: RiteCheck Services, Fees and Technology
Service Fee Technology
Checks Cashed 1.4%
Money Orders $0.89 On line Delta Money Order dispenser
Authorized Agent -- Con Edison &
Verizon
Free or $1.00 CashPoint or Pay-O-Matic Bill
payment system (some are on line real
time, some are batch process.)
Almost all Utility / Telephone /
Cable Bills
$1.00 As above
EBT $1.50 Personal Teller Machine (PTM)
Parking Tickets $1.00 Electronic Batch Process
MetroCards No Fee
Western Union / Quick Collect Scaled fee Dedicated PC
ATM $1.50
PTM (Personal Teller Machine) $1.50 NYCE / Lynk / Chase Point of
Banking
Telephone Calling Cards Retail mark up
Lotto, Instant Tickets 6% state wide (all merchants) NYS provided on line lotto machine
PayNet Scaled fee On line (uses 2 bill payment systems
above)
Postage Stamps & Stamped
Envelopes
No mark up (free service to
customer)
Merchant Coin & Currency Sales $0.25 per roll, $1 per strap
The range of services offered by RiteCheck is characteristic of the check cashing industry and
offers many of the basic financial services low-income people need. Check cashers also tend to
be open longer hours in order to serve low-wage workers. For example, RiteCheck outlets are
open as early as 7:30 a.m. and close just before 6 p.m. on weekdays, and are open 8 a.m. – 1:50
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p.m. on Saturdays. Coleman says several CCOs in New York are now open 24 hours a day.
RiteCheck’s service menus are also available in Spanish, and the stores’ cashiers reflect the
language and culture of the neighborhoods where they operate.
Based on these factors of service, convenience, and comfort, check cashers perceive their
enterprises as uniquely suited to fulfilling the financial services needs of the poor and unbanked.
An indication of this perception is the recent name change of the National Check Cashers
Association (NaCCA), a trade association of CCOs, to the Financial Services Centers of America
(FiSCA). The industry contends that the check cashing business is the most logical and
appropriate model for drawing the unbanked population into the financial mainstream. That
argument is taken a step further by Coleman, who criticizes the basic assumption that bank
accounts are the best solution for meeting the financial services needs of the poor.
A fundamental point of Coleman’s argument is that transaction-based financial services, as he
calls check cashing, is more appropriate for low-income customers than the relationship-based
services of traditional banking. In his view, the conventional wisdom that bank services should
simply be shrunk to the scale needed by low-income individuals is inappropriate because it won’t
work for banks. The fact that smaller scale—a high volume of very small transactions—is not
viable for banks is a major reason banks have pulled out of low-income inner-city neighborhoods
in recent decades. Rather, Coleman points out, the check cashers’ business model
accommodates the needs of the working poor and is thus more viable. Indeed, Coleman
contends that CCOs are more economical for poor customers because they can pick and choose
the services they want and then pay for only those, rather than paying monthly fees for a bank
account, maintaining a minimum balance, and paying penalty fees for below-minimum balances
or bounced checks.
Further, Coleman says that the check cashing business exhibits three elements essential for the
long-term survival of institutions working to meet the financial needs of the poor: access,
liquidity, and service. Check cashers provide better access than banks by being open on a
schedule that suits the poor: before and after normal business hours and on Saturdays. They are
also located in neighborhoods where low-income people live and work. Check cashers provide
liquidity appropriate for people who live from paycheck to paycheck by paying immediate cash
rather than putting a hold on funds in a customer’s account until a cashed or deposited check
clears, as banks do. Check cashers provide service by taking time with individual customers, by
helping them conduct their transactions, and often by helping their large base of immigrant
customers overcome language barriers. This transaction-based business model, which depends
on volume, dictates that CCOs provide superior customer service so customers will keep coming
back and conducting more transactions.
Coleman suggests that financial services be viewed as a continuum rather than as discrete (bank
accounts versus no bank accounts). Check cashers can provide a place for immigrants and the
poor to get temporary, transitional financial help until they are ready for a relationship with a
bank. He suggests that check cashers can and should do more to meet the financial services
needs of these marginalized populations:
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What would be genuinely helpful would be a way of offering a few transitional bank-type
services through check cashing locations without abandoning the basic model of
transaction based fee for service. That would help those low-income customers who are
ready … make the transition from transactional financial services (check cashers) to
relational financial services (banking). I believe that the joint venture between check
cashers and credit unions may lead to the evolution of a new kind of creature that without
relying on charitable or government contributions, without requiring tax exempt status,24
can thrive while at the same time provide the financial services that the poor genuinely
need.25
The Business of the Partnership
As outlined briefly in the Introduction, the cooperative arrangement implemented in April 2001
between Bethex Federal Credit Union and RiteCheck Cashing consists of four provisions, with
two primary components. First, Bethex members are able to make deposits and withdrawals
through the check cashers’ Point of Banking (POB) terminals at no cost. These POB terminals
are essentially ATMs located within cashier windows, and customers and cashiers conduct
transactions jointly. POBs are part of the NYCE regional financial exchange network sponsored
by Chase Bank and are regulated according to the established network rules (see Sidebar 4).
Credit union members may also cash checks at participating check cashers without incurring a
fee. Rather, the credit union absorbs fees at an agreed-upon discounted rate different from the
maximum (1.4%) set by New York state law. In most cases, the resulting fee will be lower than
the state limit, although the fee depends upon the amount of the check. (See Table 2 and
accompanying footnotes.) It is the same fee structure that is extended to members of PayNet, a
cooperative network of check cashers that have established a relationship with New York–area
banks to cash payroll checks from some of the banks’ large clients. Bethex joined PayNet to
facilitate its participation in the pilot. As a result, checks issued by Bethex (e.g., loan checks)
and presented at participating check cashers are eligible for the PayNet rates. In addition, Bethex
members are able to cash payroll and other checks at participating CCOs for a 1.1% fee,
discounted from the statewide 1.4% rate.
Under the other major provision of the partnership, Bethex marketing materials will be available
in participating CCOs. A basic packet of information introducing the CU’s mission and services,
these materials will also contain applications for membership and loans that individuals may
complete and mail back or drop off at one of Bethex’s offices.
24 Community development credit unions like Bethex are tax-exempt nonprofit organizations, while check cashers
are not.
25 Interview conducted by case study author, January 22, 2001.
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Table 3: Partnership Fee Structure
Transaction Cost to CU Cost to Consumer Net to Check Casher
Withdrawal
$1.88 $0.00a $1.88
Deposit
$.70 $0.00 $.70
Check cashing (issued by Bethex) $0–
$600b
$4.50 $0.00 $4.50
Check cashing (issued by Bethex) $601–
$1,000
$5.50 $0.00 $5.50
Check cashing (issued by Bethex) over
$1,000
1% $0.00 1%
Check cashing (payroll and other checks) $0.00 1.1% 1.1%
a The check casher will surcharge as provided by NYCE network rules (currently $1.50). Bethex will pay $.38
interchange at time of transaction; customer will pay $1.50, which will be reimbursed by Bethex.
b In its six years of operation, the average PayNet check cashing fee works out to be less than the regulated rate of
1.4%. This is because most of the checks that find their way into the PayNet system are greater than $350. Since
most Bethex checks are loan checks, it is a certainty that the PayNet rates will fall below the regulated fee amount.
Why It Makes Sense
Check Cashers’ Perspective and Interests
The participating check cashers have two major business interests in the credit union partnership.
The first is expanding their customer base. Volume is critical to the check cashing business, so if
people can be drawn into CCOs with the offer of accessing their credit union accounts, they may
then take advantage of other services such as bill paying, money wire transfer, etc.
Partnership with a credit union allows CCOs to offer access to depository accounts, a service
that—without such an arrangement—would fall outside their legal range of activities. Coleman
views such a partnership as an opportunity both for customers and for his own business. In an
industry dependant on fee-based services geared mainly to low-income people with relatively
small transactions, expanding the volume of transactions is critically important. Coleman and
other check cashers hope that providing access to credit union accounts will draw more people
into CCOs, where they then may find it convenient to take care of other necessary financial
transactions and thereby boost the overall volume of the check casher’s business.
Credit unions seem a logical alliance for check cashers. Unlike banks, they are already present
and working in communities that are targeted by check cashers and thus offer a ready market for
check cashers’ convenient locations and hours. As indicated, Coleman and Cousminer
recognized early on that they share a common customer base.
Additionally, Bethex’s willingness to absorb fees incurred by its members’ use of banking
services made possible through the partnership allows check cashers, through POBs, to offer
services they otherwise could not, thereby increasing their overall walk-in business volume
without bearing the transaction costs for those additional services.
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The other reason check cashers want to align themselves with credit unions is public relations.
Coleman is a former president and active executive member of the Check Cashers Association of
New York (CCANY). During his tenure as president in 1994–95, CCANY developed a strategic
plan to guide the future direction of the industry in the state. That plan established three
principal goals:
1. grow the core business by increasing the volume of checks cashed
2. form strategic alliances with banks and credit unions
3. become electronic
During that same time, Neil Levin, New York State Superintendent of Banks, was looking for
innovative ways to draw the unbanked residents of low-income inner-city neighborhoods into the
financial mainstream. Levin talked with Coleman and other check cashers about becoming more
active in and integrated into the communities in which they operated, partly to improve public
relations. Check cashers, he believed, needed to overcome their predatory image and make
people more aware of the needed services they provide to low-income communities. Levin also
saw fuller integration into communities as good business for check cashers; it would help them
identify additional needs and the best ways to meet them.
The conversations with Levin struck a chord with Coleman, who regretted not being able to offer
customers who came into his stores to cash their paychecks the opportunity to put some of that
check away into a savings account and ultimately achieve longer-term economic improvement.
Credit Union Perspective and Interests
From Cousminer’s perspective, building the broadest possible membership base is necessary to
meeting Bethex’s mission of serving the poor and those without access to financial services in
the Bronx. A broader membership base also helps to make the credit union more viable and
sustainable. Philosophically opposed to charging fees to recover operating and transaction costs,
Cousminer believes organizations such as hers should make their money through the interest
spread on loans. Expanding their membership helps achieve this goal.
In order to expand membership, Bethex was interested in establishing branches but had little
money to do so. Cousminer, treasurer and manager of Bethex, thought of working with check
cashing facilities both because CCOs have an abundance of convenient locations in low-income
neighborhoods and because Bethex had done business with them in the past. In its first twenty
years of operation, Bethex used check cashers because it had no real ability to keep cash safely
and found that banks were rude and disrespectful to its members when they tried to cash their
Bethex loan checks. As a result, Bethex started to send “ok to cash” checks to check cashers
instead—an unofficial endorsement that signaled to the check casher that the checks wouldn’t
bounce.
Although Bethex was interested in branching to meet the banking needs of a broader segment of
poor households in the Bronx, it soon discovered that cost constraints were prohibitive. “To
build a branch, no matter how small, costs a lot of money, but there are check cashers on every
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corner,” Cousminer points out.26 She estimates that establishing a branch costs a minimum of
$200,000, plus all of the ongoing operating costs—salaries for three full-time employees would
run more than $60,000 annually, plus an additional $2,000 in bonding insurance beyond what
Bethex currently pays. Then there are operational costs such as telephones, computers, etc.
Paying a fee per transaction is comparatively negligible, Cousminer argues, and using check
cashers is the most efficient way of acquiring new deposits. In addition, for people who already
cash their payroll checks for free through the PayNet system, having access to credit union
accounts could help them save.
Cousminer also asserts that using check cashers is more efficient for Bethex’s members.
Because check cashers are so prevalent in low-income neighborhoods, CCOs are much more
convenient for many credit union members than a full-service bank branch, which may mean a
round trip of more than an hour and $3 or more in bus or subway fare. That round-trip fare often
has to be paid by a low-income single mother traveling with her children or with the children of
friends or family members who are in her care. Cousminer wants to help alleviate this time and
financial barrier to accessing traditional financial services.
Beyond these direct effects, the partnership also has the broader potential of fostering name
recognition both for Bethex and the credit union movement as a whole, positively impacting
marketing and outreach.
Community Benefits
From a broader perspective, the partnership offers expanded delivery of credit union services to
people who are currently unbanked, drawing more low-income people into the financial
mainstream by counseling them on saving money, establishing a credit record, and applying for
loans—thus helping them in a more fundamental way consistent with the credit union’s mission.
Providing low-income people access to basic financial services and thus entry into the economic
mainstream has broad societal benefits as well. As these people acquire savings and credit
history, they become consumers of additional goods and services, including more advanced
financial services such as mortgage loans.
Moreover, a credit union-check cashers alliance may offer a uniquely effective way to reach the
unbanked. In immigrant neighborhoods especially, many use check cashers because they have
an established relationship with them, trust them, and feel comfortable with them. Many also
turn to loan sharks when they need to borrow money (see Sidebar 5). By contrast, they mistrust
mainstream banking institutions. Many come from countries where financial services often were
corrupt or inflation very high, contributing to their mistrust of banks in general and possibly of
any authority system. As evidence of that mistrust, Former NY Superintendent of Banks Neil
Levin cites the failure of check cashing windows established by Chemical Bank in their
branches.
Mainstream banks are rarely present in poor neighborhoods anyway, but even when they are—
and even when they offer check cashing services—they are unable to attract low-income
26 Quoted in Lauralee Ortiz, “Small CU Plans to Use Check Cashing Outlets As Branches,” Credit Union Journal 4 ,
no. 44: 1.
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unbanked customers. Coleman says banks fail to recognize that it is not simply a matter of
services offered but of the more relaxed atmosphere in CCOs, somewhat like the difference
between a fast food outlet and a fine restaurant. Low-income people are comfortable going into
the lobby of a CCO in work clothes or with several small children, just as they would be going
into a McDonald’s. However, they do not feel comfortable walking into the lobby of a
mainstream bank in the same circumstances, just as they would be uncomfortable walking into a
restaurant and being greeted by a maitre d’.
Furthermore, Coleman says banks are unable to move past the relationship model of financial
services. Even for check cashing services, Chemical wanted people to complete a form and join
their “Checks to Cash Club”. He contends that check cashers’ transaction-based model appeals
to poor customers; they do not need or want a relationship with a bank until they have enough
income to keep some of it in a bank account. Until then, they do not want to provide personal
information or otherwise establish a relationship with a bank; check cashers, who do not collect
information, provide a level of comfort. It is hoped that this arrangement, by offering banking
services through the familiar surroundings of established neighborhood CCOs, will help poor
people make the transition to mainstream banking.
The Regulatory and Advocate Responses: The Issues Surrounding This Partnership of
“Strange Bedfellows”
After more than four years of planning the pilot and working with regulators to obtain
permission to enter into partnership, Bethex, and RiteCheck received letters of approval from the
National Credit Union Administration (NCUA) in December 2000 and from the State of New
York Banking Department (NYSBD) in February 2001. The proposed partnership raised a
number of concerns among regulators and credit union advocates, and the terms of the
partnership as approved are somewhat limited compared to the original concept. NYSBD, which
oversees the state’s CCOs, required that the check cashers involved provide monthly reports on
the volume of transactions and fees associated with the partnership, as well as thirty-day advance
notice of any changes in the services offered, the project’s operations, or the participating check
cashing establishments.27
In spite of the numerous reasons the partnership seems to make sense for the business of both
principals as well as the community, there are a number of issues, questions, and possible
negative outcomes arising from the credit union–check cashers partnership. These concerns fall
into three categories. The first is a set of broad policy issues related to an alliance of any sort
between the mission-driven credit union movement and check cashers, who are viewed among
many credit union and other social policy advocates as preying on low-income communities for
profit. The second is concern about possible expansion of the partnership to include other
features or additional credit union partners in other geographic locations. Finally, there are
questions about legal liability raised by check cashers conducting business on behalf of a credit
union.
27 Paul J. Fazio, Deputy Superintendent of Banks, State of New York Banking Department, letter to Gerald
Goldman, General Counsel, Check Cashers Association of New York, February 14, 2001.
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Public Policy Issues
Advocates such as the National Federation of Community Development Credit Unions
(NFCDCU) express a concern over whether the underlying mission of the credit union
movement is in fact being served by a credit union–check casher alliance. They worry that the
credit union “brand”—its image as a positive social force—may be damaged by affiliation with
an industry whose image is less than positive in terms of service to the disadvantaged.
Moreover, the heart of the community development credit union movement is member
education, with community empowerment the ultimate goal. Advocates doubt members will
receive the same (if any) education through check cashers.
One advocate argued that if the major motivation for partnering with check cashers was the sheer
prevalence of CCOs, which would enable low-cost CU branches, why not open branches in
drugstores instead, since they are also numerous and present less risk to the credit unions’ image
and less harm to its members.28 As Cousminer points out, however, there actually are very few
drugstores in the poorest neighborhoods of Bethex’s service area in the Bronx; they have been
forced to close because of repeated robberies.
On the other hand, by aligning themselves with institutions that have a positive social agenda and
image, check cashers may be able to improve their own image and parlay that into political
legitimacy. NFCDCU officials speculate that the move may be a calculated effort by check
cashers to elevate their public image as part of a broader attempt to legalize payday advance
lending, currently not allowed in the state of New York. Credit union advocates oppose it
because high fees are charged to borrow money for a short term; poor people frequently become
mired in debt when they are unable to repay the full amount borrowed in the specified brief
period of time. Because payday advance lending is illegal in New York, the credit union–check
casher partnership is able to work. However, the check cashers’ trade association is lobbying the
New York legislature to legalize payday lending. If this happens, advocates wonder about the
implications for the partnership.
NFCDCU officials worry that check cashers could even be employing a backdoor strategy to
become essentially unregulated banks, taking deposits and making loans. Credit union advocates
need to watch this partnership vigilantly, NFCDCU believes, and not lose their resolve in other
policy areas regarding check cashers just because they now appear to be “good guys.”
Partnership Expansion Issues
Considering all the positive impacts, this kind of partnership might work fairly well, NFCDCU
representatives point out, especially in a state like New York where check cashers are strictly
regulated. They are less certain, however, about expanding and transferring the partnership to
other states. In states where payday advance lending is allowed, partnership customers could be
confused between an application for a payday advance and one for a credit union loan. It is also
possible that people who go into a CCO intending to apply for a credit union loan might be
attracted by the immediacy of an advance and wind up in a debt situation that would be harmful
to their overall economic status. In such a case, the credit union could be seen as a pre-developer
28 John Reosti, “Teaming Up with Check Cashers,” American Banker, October 25, 2000, p. 1.
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of business for check cashers, rather than the other way around, and the credit union’s mission of
educating and empowering low-income individuals would be defeated.
Cousminer responds to this concern as well, arguing that the situation could be just the opposite:
that check cashers offering payday lending could actually serve as pre-developers of business for
their credit union partners. Given the choice between a payday advance and a credit union
consumer loan, she says, most individuals would be attracted to the credit union loan—especially
if the benefits are effectively marketed—because it carries availability of a larger amount, a
lower interest rate, and a longer pay-off term. In addition, Bethex’s small consumer loans are
typically available on a same-day basis, offering cash within twenty-four hours. Cousminer
points out that most people who use payday advances for emergency cash are probably in some
sort of financial distress and could actually benefit from a larger, longer term loan. A credit
union consumer loan can be a better solution to financial difficulties than a payday advance loan,
which in her view perpetuates the difficulties and gets a person into a deeper hole.
Additionally, there is the question of whether CUs have adequate infrastructure to handle the
additional demand for products and services generated by a partnership with check cashers.
NFCDCU officials acknowledge that Bethex is probably in a good position to handle the
increased demand for services but fear that smaller CUs may be overwhelmed. This raises the
issue of the need for oversight and coordination, particularly when viewing partnerships on a
broader scale.
Legal Liability Issues
With CCO employees being involved in CU members’ business, a number of regulatory issues
arise. The first and probably most significant issue is bonding. The National Credit Union
Administration (NCUA), which approved the pilot, instructed Bethex to discuss bonding
regulations directly with its bonding agency. Within the scope of the current agreement, bonding
is not an issue. However, if the partnership expands to include additional activities, such as
accepting account or loan applications, or disbursing loan checks, the bonding issue will need to
be reexamined.
Another issue for advocates is liability: Since CCO employees would be handling cash deposits
made by Bethex members, there was concern over who would be responsible if the money in the
cashier’s drawer did not match that handed over by the CU member. When a deposit is made, it
is punched into the POB terminal in the customer’s presence, the customer is given a receipt, and
the information is automatically transmitted to Bethex over the NYCE network. A legal opinion
by Steven Bisker, Bethex’s attorney and former general counsel for NCUA, delineates that
ultimate liability for end-of-day balance discrepancies lies with the bank as sponsor of the check
casher’s participation in the NYCE network:
RiteCheck’s participation in the NYCE network is based upon its contractual relationship
with Chase Manhattan Bank (“Chase”) as a “sponsored participant”. As a federally
insured depository financial institution participant in the NYCE network, Chase is
authorized by NYCE to sponsor participants into the network. As a sponsor, Chase is
liable to NYCE “and is obligated to accept settlement and billing, for the [t]ransactions of
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its [s]ponsored participants, and must ensure utilization of the NYCE Adjustment System
for each of its [s]ponsored [p]articipants.” In other words, Chase would be liable for any
shortfalls in RiteCheck’s network settlement account and for any failures by RiteCheck to
properly notify an issuing participant (e.g., the Credit Union) of any checks deposited by
cardholders (e.g., members) to their accounts that are returned for nonpayment.
…deposits made at a POB terminal in a shared EFT network are immediately credited to
the cardholders’ (e.g., members’) accounts at their respective financial institutions (e.g.,
credit union, bank, etc.). The terminal owner (e.g., RiteCheck) is required to have an
amply funded network settlement account sufficient to cover all of the deposits credited
to the cardholders’ accounts. In the case of RiteCheck, any failure on its part to have
sufficient funds in its settlement account would result in Chase being liable for such
funding.29
Any expansion of provisions in the partnership could trigger the issue of liability again. For
instance, in earlier versions of the partnership proposal, check cashing employees would be
allowed to help customers complete applications for new accounts or loans; the applications
would be submitted to check cashers and then forwarded to Bethex. For regulators, such a
provision raises concerns over whether check cashing employees are adequately trained or
skilled to meet the legal regulations imposed on credit unions, which include full disclosure and
truth-in-lending requirements. Coleman envisions the partnership eventually incorporating this
element, as well as a provision allowing check cashers to disburse loan checks. Since such
activities go beyond electronic transactions that are covered by the NYCE network operating
rules and backed by banks, such an expansion of the partnership would require additional
regulatory scrutiny.
Conclusions: The Regulatory Environment—Impact of Regulators’ Attitudes on the
Partnership
The reason for so much regulatory scrutiny and hesitation in this particular case, as opposed to
other partnerships involving check cashers, may lie more in perceptions about credit unions than
in those about check cashers. Community development credit unions are seen as performing a
service to disadvantaged people and communities, a positive good as opposed to a neutral entity
(like banks and convenience stores, for example). For this reason the community development
credit union sector is often referred to as a “movement.” It is possible that regulatory hesitation
to approve the alliance stemmed partly from fear of tarnishing the image of the whole movement
by sanctioning its partnership with check cashers. The corollary is an uneasy feeling of giving
check cashers an undeserved positive image via association with the CU movement. This is,
29 Steven R. Bisker, Attorrney, representing Bethex Federal Credit Union, letter to Layne Bumgardner, Regional
Director, Region I (Albany), National Credit Union Administration, December 12, 2000.
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perhaps, where much of the tension about the partnership rests and the reason for wanting to
limit it so significantly.
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Sidebar 1: Check Cashers’ Revenues and Profitability
Because most check cashing outlets
(CCOs) are privately owned, there is
little available information on the
industry’s revenues and profitability. A
study done by Dove Consulting for the
U.S. Treasury Department in 2000
provides a snapshot of the industry.
Surveying CCOs in four major
metropolitan markets —Atlanta, Boston,
San Antonio, and San Diego.1 Dove
found that annual revenues vary among
markets, from a little more than $84,000
in San Diego to almost $325,000 in
Boston.
Two-thirds of all revenues are derived
from check cashing fees, far exceeding
the second-place service, money
transmission (wiring money), at 18%.
Fees charged for money orders
contribute 10% of revenues. Overall,
loans comprise only 3% of revenues in
the four market areas studied. However,
San Diego is the only market included in
the study that allows payday advance
loans; there, loans represent 16% of
average store revenues. Two-thirds of
CCOs’ revenues pay for operating costs,
with salaries and payroll expenses
comprising the largest chunk at 27%,
followed by rent (11%), cash and money
services (9%), and bad debt (7%). In
terms of profitability, overall pretax
return on sales averaged 34% among the
surveyed stores. The study also found
that chain stores had higher average
pretax income than independent stores
($65,000 compared to $39,000).
1 Survey of Non-Bank Financial Institutions.
Dove Consulting, for U.S. Department of the
Treasury. April 4, 2000. Available at:
http://www.treas.gov/press/releases/docs/nbfirpt.
pdf.
Detailed financial information is
available for Ace Cash Express (ACE), a
publicly traded company that is one of
the largest in the check cashing industry.
ACE operates 1,200 stores (13% of
which are franchised) in thirty states and
the District of Columbia. Like most
check cashers, ACE offers an array of
transactional services, including short-term
consumer loans through a
partnership with California-based
Community West Bancshares.
ACE’s 2000 sales totaled $140.6
million, a 15% increase over the
previous year and nearly double its ten-year
average of $74 million. The 15%
increase was actually a bit of a decline
from the company’s ten-year average
annual growth of 24%. Net income
grew by just 7% in 2000, though its five-year
average growth in this respect is
36%. Company sales had profit margins
of 6.8% and 5.9% in 1999 and 2000,
respectively; reflective of the firm’s ten-year
average of 6%.2
ACE’s return on assets (ROA) and
return on equity (ROE) figures have
remained rather stable in recent years.
Its ROA was 4% in 2000, just down
from 5.7% in the preceding year and
4.8% in 1998.3 This is significantly
higher than the average ROA for the
nation’s largest 100 commercial banks,
which had average returns of 1.4% and
1.5% in 1998 and 1999.4 ACE’s ROE is
also comparable to that of large banks;
2 Ace Cash Express, Inc, 2001 Hoover’s
Company Profile Database–American Public
Companies.
3 Ace Cash Express, Inc. Disclosure Incorporated
2001 company report.
4Sheshunoff Information Services, data available
at http://www.americanbanker.com.
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its return has been consistently around
16.5%5 over the last three years, while
the average ROE of the twenty largest
commercial banks was 18.6% in 1999.6
5 Ace Cash Express, Inc. Disclosure Incorporated
2001 company report.
6 Michael Blanden, "U.S. Commercial Banks: A
Bumper Year But…" The Banker 150, no. 889
(March 1, 2000).
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Sidebar 2: Examples of Bank-Check Casher Partnerships
The move to paying government benefits
by electronic funds transfer has
increased a trend toward partnerships, as
check cashers seek to hold on to their
profits from cashing government checks
while banks eye government
beneficiaries as a pool of potential
customers. At the intersection of these
interests, several banks and check
cashers have formed partnerships to
provide complementary services. One of
the largest such partnerships was
established between the National Check
Cashing Association (NaCCA, now the
Financial Service Centers of America, or
FiSCA) and Citibank. In 1999, the
partnership unveiled a new electronic
product called the NaCCA Preferred
Card, which enables federal benefit
recipients to open a special Citibank
account into which their benefits will be
electronically deposited.1 They may
then access their benefits at any ATM or
participating check casher by using the
debit NaCCA Preferred Card. Fees vary
depending on the check casher; monthly
fees range from $3 to $6, with
withdrawals ranging from $1 to $4,
depending on whether customers access
their benefits at check cashers, ATMs, or
point-of-sale terminals.2
InnoVentry, a joint venture between
Wells Fargo and Cash America, owner
of pawnshops and CCOs, is developing
automatic tellers that cash paychecks for
people with or without bank accounts.
The terminals, called Rapid Pay
Machines (RPMs), are essentially ATMs
1 “NaCCA Announces New Debit Card
Program,” NaCCA/FiSCA press release, January
11, 1999, available at
http://www.nacca.org/pr6.htm.
2 “NaCCA Preferred Card…Pilot Program
Announced,” NaCCA Currents (July 1998): 2.
that rely on face-recognition technology.
The earliest RPMs were located in
convenience stores, discount stores such
as Kmart, and some Kroger
supermarkets. In May 2000, InnoVentry
announced an agreement with Diebold to
place similar machines in bank lobbies
to enable unbanked employees to cash
their payroll checks without having to
stand in the teller lines; this would cut
down on per-transaction costs for the
banks.3
These examples highlight banks’ desires
to tap into and profit from the unbanked
market without having to serve poor
people directly, without having them
stand in bank lobby lines, and without
providing them access to mainstream
financial services.
Other banks have elected to create their
own freestanding check cashing
operations. In an effort to become the
principal financial services provider in
the United States, Banco Popular
established its own check cashing arm,
Popular Cash Express (PCE), in early
1998.4 PCE offers services typical of
check cashing outlets as well as some
expanded services, such as insurance and
travel services, and is exploring offering
credit cards and personal loans. As of
late 2000, PCE operated seventy-five
retail financial service centers in New
3 “InnoVentry and Diebold Form Marketing
Alliance to Bring Banks ATM Check Cashing
Solution for Non-Account Holders,” Business
Wire, May 17, 2000.
4 Jose Riera, “Banco Popular and Popular Cash
Express: Providing Financial Services to the
Unbanked,” Community Developments
(Community Newsletter of the Office of the
Comptroller of the Currency, U.S. Department of
Treasury), Fall 2000, p. 11.
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York, California, Texas, Arizona,
Florida, and Washington, D.C.
Westamerica Bancorp started its own
chain of check cashing outlets, called
Money Outlet Inc., in late 2000. The
northern California stores are cashing
checks and selling money orders
exclusively but plan to expand to other
typical CCO services if they do well.
Westamerica’s relationship between its
two businesses is virtually the polar
opposite of Banco Popular’s.
Westamerica is not marketing bank
accounts to Money Outlet customers; in
fact, signs advertising the CCOs do not
even acknowledge an affiliation with the
bank. This separation is deliberate;
Westamerica officials say they view
check cashing as a completely different
market that is not served by banks. This
distinction makes perfect business sense
to one investment analyst, who thinks
Westamerica is wise to protect its
reputation as a leading small business
lender: “Check cashing is a different
type of business, with a down-market
customer who has a very different set of
financial needs. You don’t want to mix
those brands, or you risk diluting the
value of your brand.”5
Union Bank of California, the state’s
third largest commercial bank, also has
entered the business. Its Cash & Save is
a hybrid program that goes beyond
check cashing by using education and
consulting services to encourage those
accustomed to using check cashers to
transition to traditional banking services.
Begun at its Hawthorne location in
south-central Los Angeles in 1993, Cash
5 R. Jay Tejera, senior analyst, Ragen
MacKenzie, quoted in Katie Kuehner-Hebert,
“California’s Westamerica Enters Check-
Cashing Biz,” The American Banker, November
16, 2000, p. 1.
& Save provides a full range of services
targeted to lower-income, ethnic markets
with large contingents of unbanked
workers. While each location provides
basic check cashing services—at lower
fees than those generally charged by
CCOs—what distinguishes Cash & Save
is the range of banking services it
provides. These include a discounted
rate for buying a money order “plan”
(six free money orders per month plus a
1% check cashing fee), no-fee low-minimum-
balance basic checking and
savings accounts, a secured credit card,
and direct deposit for electronic delivery
of government benefits. The bank
estimates that 40% of Cash & Save’s
repeat customers had transitioned to
traditional banking products such as
checking and savings accounts by late
2000.6
In addition to its own check cashing
outlets, Union Bank has entered into an
alliance with Nix Check Cashing and
Operation HOPE, Inc., a community-based
nonprofit, to provide financial
services in inner-city Los Angeles
neighborhoods. Under the terms of the
agreement, Union Bank acquired a 40%
stake in Nix’s parent company, Navicert
Financial, Inc., with an option to acquire
the remainder of the company in ten
years, during which time Union Bank
will give 5% of the company’s equity to
Operation HOPE.7 Through
participating Nix outlets, Union Bank
offers applications for home mortgage
loans, credit cards, checking and savings
accounts; a dedicated phone line with
6 “Banking, Financial and Educational Services
Offered At Nix Check Cashing Stores,” Business
Wire, September 28, 2000.
7 “Unique Venture Teams Nix Check Cashing,
Union Bank of California and Operation Hope;
‘We’re Bringing Banking Back to the Inner
City’,” Business Wire, March 16, 2000.
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access to a customer service
representative; a full-service ATM with
no surcharge for nonbank customers;
and small business loan and deposit
services. For its part, Operation HOPE
offers mortgage assistance, consumer
and business credit education
information through brochures, and a
direct phone lineto get information about
and register for these financial education
opportunities. . The partnership, seen by
Union Bank as a way to provide poor
people with a bridge into the financial
mainstream, was implemented at three
Nix stores in July 2000; the partners
anticipate expanding the services to all
forty-seven Nix outlets over the next two
years.8
Union Bank’s approach does not give
low-income individuals access to the full
range of mainstream financial services
offered by the bank. While each Nix
store in the pilot has a teller window
bearing a Union Bank sign, the teller’s
job is to help people open Union Bank
accounts and to direct them to
information and automated services
nearby. Basic banking transactions such
as deposits, withdrawals, and check
cashing, even for Union Bank
accountholders, are only available
through the Nix windows, at the check
casher’s normal rates. This situation
leads some advocates to criticize Union
Bank for continuing to relegate low-income
neighborhood residents to
second-class financial services.9
In response, Union officials point out
that the bank is legally restricted from
offering teller transactions through Nix
8 “Banking, Financial and Educational Services,”
Business Wire.
9 Laura Mandaro, “Union Bank, Check-Casher
Team Up,” The American Banker, September 25,
2000.
outlets.10 Beyond that limitation,
however, turning Nix offices into Union
Bank branches runs counter to the model
the bank is pursuing, at least in the short
term. The bank’s experience has
demonstrated that it is difficult for new
branches in low-income neighborhoods
to generate the volume of accounts
necessary to sustain themselves. In the
Nix partnership, Union has chosen to
build on a fully financed and functioning
platform so that the expected slow
growth in accounts is offset by the
revenues from typical check cashing fees
provided by Nix.11
10 Union Bank invested in Navicert without
regulatory approval, taking advantage of the
Gramm-Leach-Bliley Financial Modernization
Act of 1999, which eliminated barriers to banks
owning other financial businesses.
11 Ibid.
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Sidebar 3: What Is a Community Development Credit Union?
A credit union is a nonprofit,
cooperative financial institution.
Members (the equivalent of depositors to
a bank) are the shareholders: They own
the credit union and govern its
operations. Credit union membership is
restricted to a specific “field of
membership,” which may be based on
where the members live, the company
for which they work, or the organization
to which they belong.1
A community development credit union
(CDCU) is a geographically-based
cooperative established by people in
low-income communities as a way to
pool their savings and make loans to
each other. CDCUs are driven by a
mission of reinvesting in distressed
neighborhoods and communities and
empowering poor families to become
economically self-sufficient. To meet
this mission, CDCUs provide basic
financial services at low costs and access
to credit to traditionally underserved
populations.
Like all credit unions, CDCUs are:
• democratically controlled
• nonprofit
• insured and government
regulated
• operated by volunteer boards of
directors
CDCUs are distinct in their mission of
serving low-income communities.
Federal law and regulations support the
CDCU mission by allowing these
institutions to raise deposits and capital
1 “Credit Unions and Banks: What’s the
Difference?” available at the Bethex Federal
Credit Union web site,
http://www.bethexfcu.org/difference.htm.
from nonmembers, including
foundations, banks, faith-based
institutions, and other social investors.
CDCUs as a whole are often referred to
as a movement because of their mission-driven
orientation and because they have
created a national organization to
advocate on poverty issues as well as on
policies that impact their operation.
There are nearly 200 CDCUs serving
urban and rural communities in forty
states, spanning a broad spectrum of age,
size, and operational sophistication.2
The movement began fifty years ago,
with the first CDCUs organized to
combat lending discrimination. The
most recent ones were created in the
1990s to meet the financial service needs
in neighborhoods where banks had
downsized and closed branches.
Some CDCUs offer basic services one or
two days a week in community facilities,
such as church halls. Others have
modern, full-service facilities, complete
with ATMs.
All CDCUs offer small consumer loans.
Some provide financing on a larger scale
for housing, small and minority-owned
businesses, and nonprofit organizations.
While providing their members capital
for immediate needs, such as medical
bills or a car to reach a distant job,
CDCUs also help members save and
borrow for long-term goals, such as
buying a first home, starting a small
business, or getting a college education.
2 “What are CDCUs?” Available at the National
Federation of CDCUs web site,
http://www.natfed.org/Home.html.
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Sidebar 4: Point of Banking Terminals – A Critical Technological Link
Check cashers’ ability to accept deposits
from Bethex Federal Credit Union
members is clearly the most critical
feature in making this alliance unique
and innovative. That ability is made
possible by a financial transactions
terminal called a Point of Banking
(POB) terminal, found in RiteCheck and
several other check cashing outlets in
New York. Because of the critical role
the POB plays in making banking
services available through CCOs, it is
important to understand its operation and
implications.
What Is a POB?
In simplest terms, a POB is an ATM
without a cash dispenser. It looks and
functions in a manner very similar to
Point of Sale (POS) terminals used in
retail establishments to receive
electronic payments. The POS is
generally offered as a convenience to
customers, and a merchant pays a fee
(which is not passed on to customers) to
route transactions over the POS network.
POBs provide consumers with remote
access to banking services and initially
were developed cooperatively by Chase
Manhattan Bank, the NYCE network,
and the check cashing industry in 1994.
In their first incarnation, POBs could
perform cash withdrawals, transfers
between accounts, and balance inquiries;
they have expanded to accept deposits as
well, a feature that RiteCheck president
Joe Coleman refers to as a quantum leap.
In his words, “The deployment of POBs
will enable ... storefront service centers
(licensed check cashing outlets…) to
offer banking products, from a variety of
banks, in a convenient and cost effective,
neighborhood setting.”1
The Nuts and Bolts: How Do POBs
Function?
A check cashing business wanting POB
terminals enters into an agreement with
Chase Manhattan Bank to deploy one or
more POB terminals in a location.
Chase sponsors the CCO in the NYCE
network, with which Chase has a
contractual agreement.
Here is how a deposit transaction works:
1. Customer enters CCO with a $200
payroll check from Employer Y and
a debit ATM card from Bank X.
Customer wishes to deposit the
money from her payroll check into
her checking account at Bank X.
2. Customer approaches one of the
cashier windows, tells the cashier
what she would like to do; she first
cashes her check and receives
$197.80 cash ($200 less the 1.1% fee
for credit union members as part of
the terms of the pilot partnership
detailed in this case).
3. To deposit the cash, customer next
swipes her card and enters her
personal identification number (PIN)
into the POB.
4. Cashier enters the appropriate
information into the POB.
5. The POB routes this information via
the phone line through the NYCE
network to Bank X’s computer.
6. Bank X sends back a confirmation
that $197.80 has been deposited into
1 Joseph Coleman, “Introducing Point of
Banking,” Document used as handout/primer for
CCANY members, undated.
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the customer’s Bank X checking
account, and the POB prints a
receipt, which the cashier hands to
the customer.
7. The customer can also purchase a
money order, pay a bill, or receive
part of her paycheck in cash in the
course of this exchange. These
transactions would simply be
deducted from the amount deposited,
and this information would be
reflected on the receipt the customer
receives. Combining steps allows
customers to conduct multiple
transactions at one place, which is
different from (and, perhaps, more
convenient than) ATMs. So, instead
of taking a payroll check to a CCO,
buying a money order, getting the
remainder in cash and then taking the
cash to an ATM for deposit, the
customer is able to perform all steps
at one cashier’s window.
The customer receives a printed receipt
confirming that the transaction has been
recorded in her bank or CU account. If
the cashier’s drawer does not reflect the
deposit at the end of the day, the liability
lies with the check casher and,
ultimately, with Chase as the sponsor of
the check casher in the NYCE network.
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Sidebar 5: Poor and Immigrants Turn to Loan Sharks for Debt Capital
Community development credit unions such
as Bethex must compete with a way of
borrowing that is entrenched in mostly poor,
immigrant neighborhoods in New York and
across the country—loan sharking. Loan
sharks are informal lenders who provide
debt financing to poor people, often to start
small businesses. While New York law caps
annual bank loan interest at 25% and
person-to-person loans at 16%, the loan
sharks’ typical going rate of 2% to 5%
weekly amounts to 104% to 260%
annually.1
The ability of these illegal lenders to thrive,
even in communities where mainstream
banks are present, is a result of a
combination of cultural factors. Many
Latino borrowers come from countries
where the poor usually do not have access to
banks and have little money to save. Illegal
immigrants particularly fear banks because
of questions about their immigration status.
They can’t get a bank account without a
Social Security number, so they don’t go to
banks for fear of being discovered and
deported. Often, they do not keep the
financial records necessary to apply for a
commercial loan. Moreover, loan sharks
tend to make loans more quickly, ask fewer
questions, and be more understanding about
a borrower’s inability to pay.
Modern-day loan sharks are not linked to
organized crime and do not use threats or
coercion to force repayment. Instead, they
tend to secure collateral to seize if the loan
fails—often the property the borrower is
trying to lease or buy. Some will hold
jewelry or watches or the borrowers’
immigration papers until the loan is repaid
1 Dexter Filkins, “In Some Immigrant Enclaves, Loan
Shark Is the Local Bank,” New York Times, April 23,
2001, Section A, p. 1.
and as insurance that the borrower does not
disappear.